This paper is to be submitted to Mr. Booker as an assignment. It essentially focuses on two questions: a) How does the free market deal with the fundamental question of micro-economics? b) What problems are posed by merit, demerit and public goods? Fundamental question of micro-economics So, first, what is economics? According to Paul A.
Samuelson, economics is “the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. ” Very briefly, we may summarise that economics is the study of how people choose to use resources.
The economic problem is said to arise when we have scare resources to satisfy our unlimited wants. As a result of this problem, which is sometimes called the problem of scarcity, choices have to be made over the following points: 1. What to produce? A classic question here that we often heard of is “Butter or cannon? ” Should an economy produce more consumer goods, e. g. TVs, which can immediately raise people’s living standards, or put more resources into produce more machinery that would enhance the economy’s production capability in the long run?
How to strike a balance over the quantities of diffident goods are going to be produced is well worth considering for the decision-makers. 2. How to produce? Generally, what we expect the market going to do is to obtain maximum use out of resources available. This is obvious, but some other issues besides purely economic concerns also should be considered. For example, even though we could produce more goods by forcing labours to accept longer working-hours; this is not something we should do, since there exists moral objections.
So, the decision to maximise output and satisfy more wants would need to consider the full impact on the environment and any potential long-term health risks. 3. For whom to produce Though, on the surface, almost all the countries agree that the wealth allocating system in an economy should be “fair” for both the poor and the better off; in fact, there are some attempts to create a more egalitarian society through policies that re-distribute wealth and income society from the rich to the poor in some capitalism countries, but they are merely self-deceiving, from my point of view.
The reason is quite straightforward: the powerful capitalists are the very people who actually operate the political machine in capitalism countries; never would they enact laws which may deprive them of their wealth, would they? (Pardon me for holding such an “extreme” opinion, Mr. Booker, but I have to be honest! ) Factors of production Now, in the next two pages, let’s sort out four types of resources involved in a production process, known as factors of production: i) Land. In economics, land refers to all natural resources, which can either be renewable and non-renewable. Renewable resources are replaced automatically by nature and so can be used on a continual basis, e. g. rivers; non-renewable resources, in contrast, are not automatically replaced, e. g. fossil fuels. Land is probably the most occupationally mobile of economic resources. However, land is absolutely geographically mobile- we can never move land from Suzhou to Suzhou! ii) Labour Labours are the people who actually working in a production process.
Labours are often not occupationally and geographically mobile due to a series of reasons, e. g. lack of skills or reluctance to accept a higher house price in another place. iii) Enterprise or entrepreneurship An entrepreneur is someone who put the other three resources together into production. Two functions that this factor carries out: a) To organise the other economic resources. b) To take risks involved in the production. Some risks, including fire, theft and flood, can be insured against but others, like costs of production rising, tastes changing, cannot.
The entrepreneur is considered as the most mobile of economic resources. They are usually versatile. For example, an entrepreneur who is organising the production of a shoes manufacturing factory is very like to have the ability to run a clothes-making firm; they are also often willing to move from one area to another, since they are always seeking the place where they can make the most profit! iv) Capital goods Capital goods which may be also called producer goods are any man-made aids to production, e. g. ffices, warehouses or a printer. Most machines, equipment and processed raw materials are geographically mobile, even there may involve extra transportation cost, but goods such as factories, offices are not. Many specialised machines e. g. sausage machines are occupationally immobile; while others which are of general use, like a printer, can be occupationally mobile. Economic systems There mainly exist three kinds of economies, the command economy, the free market economy and the mixed economy. 1. The free market economy
In a free market economy decisions on how resources are to be allocated are taken by households and firms. The key point is that they interact as buyers and sellers in the market for goods and services. Prices act to indicate the likely market value of particular resources. Figure 1: A Circular Flow Diagram of a Free Market Economy Many economists believe that in a free market economy, the price system is an “invisible hand”, which brings together private and social interests in a harmonious way and the government is of no need to intervene the conomic activities; this is the fundamental philosophy underpinning the workings of the market economy. However, in my opinion, even though the markets can play a very important role to a great extent, the government need to intervene in order to obtain a sustainable, continuous economic growth. A best example could be U. S. , which was proud of having the most characters of the free market economy, is now in a great hurry to nationalise AIG and many other banks in the economic crisis.