Economics

Human wants are unlimited, but the resources necessary to satisfy those wants are limited. So, every society is faced with the identical problem, the problem of scarcity. With this in mind we can define economics as the social science that describes and analyzes choices from among scarce resources to satisfy its wants.

The development of modern economics began in the 17th century. Economists have two ways of looking at economics and the economy. One is macro approach, and the other is the micro. Macroeconomics is the study of the economy as a whole. Microeconomics is the study of individual consumers and the business firm.

The resources that go into the creation of goods and services are called the factors of production. The factors of production include natural resources, human resources, capital and entrepreneurship. The price paid for the use of land is called rent. The price paid for the use of labor is called wages. Capital is something created by people to produce other goods and services. Payment for the use of someone else's money or capital is called interest. Entrepreneurship is the managerial or organizational skills used by most firms to produce goods and services. The reward to entrepreneurs for the risks, innovative ideas and efforts that they have put into the business are profits.

In exercising the choices imposed upon people by their unlimited wants and limited resources, every society must come to grips with the fundamental economic questions:

• What goods and services are to be produced?

• How are they to be produced?

• Who will receive them?

The way in which a society goes about answering these fundamental questions is known as its economic system. Economic systems may be classified as traditional, command or market systems.

Economic systems

There are three major kinds of economic systems: traditional, command and market.

In a society with a traditional economy nearly all economic activity is the result of ritual and custom. Individuals are not free to make decisions based on what they want or would like to have. Instead, their roles are defined. The main advantage of the traditional economy is that everyone has a role in it. The main disadvantage of the traditional economy is that it tends to discourage new ideas and even punishes people for breaking rules or doing things differently.

A command economy is one where a central authority makes most of the What, How and for Whom decisions. Economic decisions are made at the top and people are expected to go along with choices made by their leaders. The major advantage of a command system is that it can change direction drastically in a relatively short time. The major disadvantage of the command system is that it does not always meet the wants and needs of individuals. The second disadvantage of the command economy is the lack of incentives that encourage people to work hard.

In a market economy, the questions of What, How and for Whom to produce are made by individuals and firms acting in their own best interests. A market economy has several major advantages. First, a market economy is flexible and can adjust to change over time. The second major advantage of the market economy is the freedom that exists for everyone involved. The third advantage of the market economy is the lack of significant government intervention. The final advantage of the market economy is the incredible variety of goods and services available to consumers.