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Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle
Edition 7ISBN: 978-0133020267Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle
Edition 7ISBN: 978-0133020267 Exercise 2
Elaborate on the basic economic questions of what, how, and for whom. Provide specific examples of these questions with respect to the use of a country's scarce resources.
Explanation
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Economics is the study of how individuals use limited resources to satisfy their unlimited wants. Scarcity of economic resources is the core of all economic problems. Because of scarcity every economic system has to make a choice and face three basic economic questions of What to produce, How to produce, and For whom to produce.
All the three economic questions are related to the allocation of scarce resources. Let's elaborate them:
What to produce : The very basic economic question is what to produce and how much to produce with the limited available resources. An economy or a society must decide, what should be the combination of various goods and services to be produced to fulfil the unlimited wants of the individuals with the scarce resources of production. There are 3 resources of production i.e. land, labour and capital. Now, what to produce is an allocation question, of how to allocate these limited resources in order to produce various goods and services.
As, because of scarcity of resources it is not possible to fulfil the wants of all the individuals, therefore, a nation must decide what combination of goods and services to produce o satisfy the needs of the individuals and society to some extent.
We can give example of this question with respect to the use of a country's scarce resources. For example, a nation has to decide how much of the scarce resources should be allocated in the defence sector, and how much should be allocated to domestic sector like hospitals, schools, infrastructure, houses, industry etc. If more resources are devoted to defence sector, there will be less resources for domestic sector, and vice versa. If the nation decides to allocate more resources to domestic sector, it has to further decide what portion of the production will be in the form of capital goods and how much will be in the form of consumer goods. Therefore, the nation has to decide what portion of the limited available resources should be allocated to which sector, in order to satisfy the maximum wants.
How to produce : After encountering the first problem, the economy or society is faced with the question of how to produce the goods and services. It is basically an efficiency question. There are number of ways to produce the goods and services. They can be produced with labour intensive techniques or capital intensive techniques. It is a question of how many workers will be employed as compared to usage of machines. Whether the tools are simple or complex, will the methods of production be highly sophisticated involving complex machines with less labour force. It involves decisions regarding the particular mix of inputs to produce a good or service.
For example, if a nation decides to produce consumer goods, it must also decide the method of production to produce these consumer goods. Due to the scarcity of the required resources, an economy must decide whether to use labour intensive or capital intensive techniques of production. If the concerned economy lacks skilled labour force, it must rely on capital intensive techniques to produce efficiently.
For whom to produce: Once it is decided that what to produce and how to produce, the next question is for whom will it be produced. As, it's not possible for an economy to produce enough goods that will satisfy everyone's wants, there must be some method for distributing the scarce goods and services among the masses. An economy must have some organised set of procedures or economic system which determines how the goods are services are distributed in the economy. Basically there are 3 kinds of economic systems in the world. They are (1) Traditional economies (2) command economies (3) market economies.
In traditional economies a family or a tribal unit produces and consumes most of the goods. In command economies, it is the government which decides and answers all the three basic economic questions. However, in market economies, the question of what, how and for whom to produce is decided in freely operating markets by the individuals and businesses.
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All the three economic questions are related to the allocation of scarce resources. Let's elaborate them:
What to produce : The very basic economic question is what to produce and how much to produce with the limited available resources. An economy or a society must decide, what should be the combination of various goods and services to be produced to fulfil the unlimited wants of the individuals with the scarce resources of production. There are 3 resources of production i.e. land, labour and capital. Now, what to produce is an allocation question, of how to allocate these limited resources in order to produce various goods and services.
As, because of scarcity of resources it is not possible to fulfil the wants of all the individuals, therefore, a nation must decide what combination of goods and services to produce o satisfy the needs of the individuals and society to some extent.
We can give example of this question with respect to the use of a country's scarce resources. For example, a nation has to decide how much of the scarce resources should be allocated in the defence sector, and how much should be allocated to domestic sector like hospitals, schools, infrastructure, houses, industry etc. If more resources are devoted to defence sector, there will be less resources for domestic sector, and vice versa. If the nation decides to allocate more resources to domestic sector, it has to further decide what portion of the production will be in the form of capital goods and how much will be in the form of consumer goods. Therefore, the nation has to decide what portion of the limited available resources should be allocated to which sector, in order to satisfy the maximum wants.
How to produce : After encountering the first problem, the economy or society is faced with the question of how to produce the goods and services. It is basically an efficiency question. There are number of ways to produce the goods and services. They can be produced with labour intensive techniques or capital intensive techniques. It is a question of how many workers will be employed as compared to usage of machines. Whether the tools are simple or complex, will the methods of production be highly sophisticated involving complex machines with less labour force. It involves decisions regarding the particular mix of inputs to produce a good or service.
For example, if a nation decides to produce consumer goods, it must also decide the method of production to produce these consumer goods. Due to the scarcity of the required resources, an economy must decide whether to use labour intensive or capital intensive techniques of production. If the concerned economy lacks skilled labour force, it must rely on capital intensive techniques to produce efficiently.
For whom to produce: Once it is decided that what to produce and how to produce, the next question is for whom will it be produced. As, it's not possible for an economy to produce enough goods that will satisfy everyone's wants, there must be some method for distributing the scarce goods and services among the masses. An economy must have some organised set of procedures or economic system which determines how the goods are services are distributed in the economy. Basically there are 3 kinds of economic systems in the world. They are (1) Traditional economies (2) command economies (3) market economies.
In traditional economies a family or a tribal unit produces and consumes most of the goods. In command economies, it is the government which decides and answers all the three basic economic questions. However, in market economies, the question of what, how and for whom to produce is decided in freely operating markets by the individuals and businesses.
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Managerial Economics 7th Edition by Paul Keat ,Philip Young,Steve Erfle
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