How are the different goods produced? Having asked what and how goods are being produced and how the total national product is distributed, it is but proper to ask further whether the production and distribution decisions of an economy are efficient ones. All economies whether they are capitalist, socialist or mixed, must take decision about them. Content Guidelines 2. have been propounded to explain and analyse the growth problem of the industrialised developed countries. Economic theory studies how these decisions are arrived at in various societies. Resources are not only scare but also have alternative uses. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Value of commodities is derived in the ultimate analysis from utility, and value of factors derived from productivity imputed by the commodities which they help in producing. For attaining economic efficiency, product-mix, that is, allocation of resources among production of various goods should be in accordance with the preferences of people, given their incomes. This is because the choice of a production technique determines not only the cost of production of a commodity but also the surplus which can become a source for further investment. Thus, a society has to choose whether it wants to produce with labour- intensive methods or capital-intensive methods of production. In the thirties and forties, with the publication of Keynes’ General Theory of Employment, Interest and Money, the problem of depression and business cycles occupied the minds of the economists. Causes of Economic Growth: In the short term, an increase in aggregate demand may stimulate a rise in output if the economy has unused resources. If the society decides to produce a particular good in a larger quantity, it will then have to withdraw some resources from the production of other goods and devote them to the production of the good which is to be produced more. If the resources were unlimited, the problem of what goods are to be produced would not have arisen because in that case we should have been able to produce all goods we wanted and also in the desired quantities. Scarcity is universal and applies to all individuals, organisations and countries. Obviously, it is a problem of the choice of production techniques. Labour, land and capital are factors of production and all of them contribute to the production of national product and get prices or rewards for their contribution. Likewise, the distribution of the national product among individuals of a society is efficient if it is not possible to make, through any redistribution of goods, some individuals or any one person better off without making any other person worse off. Besides the economy may have achieved technological efficiency in the use of its resources for the production of goods but its pattern of production may not conform to the consumers’ preferences so that there are long queues outside the markets or stores selling commodities whose level of production has been quite insufficient or inadequate as compared to the wants of the consumers for them. But economic resources are unequally scarce; some are more scarce than others. In the theory of production we study the physical relationship between inputs and outputs. More equal is the distribution of income, more equal will be the distribution of national product. Whatever the type of economy, be it capitalist, socialist or mixed, a decision has to be made regarding allocation of resources. In our daily life, we have various forms of scarcity. Thus with the achievement of economic efficiency a society not only produces the largest possible output with the available resources but also allocates its resources for the production of goods in such a way that conforms to consumers’ preferences. Before publishing your Articles on this site, please read the following pages: 1. “Inequality” is an easy, but sometimes misleading term used to describe the systemic barriers leaving groups of people without a voice or representation within their communities. The greater the quantity of a good which is desired to be produced, the greater the amount of resources allocated to that good. The producers in a free-market economy, motivated as they are by profit considerations, take decisions regarding what goods are to be produced and in what quantities by taking into account the relative prices of various goods. Corruption 9. The economic roots of the Civil War reach almost to the beginning of English settlement in North America.The development of an economy based on the use of slave labor to produce staple crops through a plantation system in the South and a more diverse economy in the North based on free labor set the stage for the development of two economies … In our opinion, it is the failure to achieve economic or allocative efficiency which was the chief economic cause of the downfall of communism in erstwhile USSR and East European countries. Some of these may be obvious, but in other situations, i… Resources are not only scarce, but they can also be put to various uses. Economic growth, which has been stuck between 1-2% for several years, has fallen to zero this year. The production would be economically inefficient if it is possible by rearranging the allocation of resources to increase the production of one good without reducing the output of any other. It is not enough to allocate resources efficiently for production among goods and distribute then efficiently among individuals for consumption. It helps to solve economic problems like poverty, unemployment, inflation, deflation etc. Resources being scarce, it is desirable that they should be most efficiently used. Corporate scandals 8. Causes of Economic Problem: Prof. Lionel Robbins in his famous book, “An Essay on the Nature and Significance of Economic Science” (1932), has given the following reasons for the emergence of economic problem. Economic Efficiency Vs. This is because if technical efficiency in the use of resources is not achieved, it would then be possible to make some people better off by increasing production through fuller and better utilisation of resources without making others worse off. As a result, economy has to make choice between the alternative uses of the given resources. If the productive capacity of the economy is growing, it will be able to produce progressively more and more goods and services with the result that … This is because resources being scarce, a community will try to use all the available resources to achieve maximum possible satisfaction of the people. If all human wants had been of equal importance, then it would have become impossible to make choices. Thus, at times of depression in capitalist economies, even the scarce available resources are not fully employed. Cost of production governs the supply of goods which together with demand for them determines their prices.The theory of production thus becomes a part of microeconomic theory (i.e. For example, petrol is used not only in vehicles, but also for running machines, generators, etc. It is important to note that the distribution of national product depends upon the distribution of money income. Now, the incomes can be earned either by doing some work or by lending the services of one’s property such as land, capital. Keynes who in his book “General Theory of Employment, Interest and Money “published in 1936, explained what caused such involuntary unemployment of resources. 2. land, labour, capital, etc.) An economic problem is basically the problem of choice which arises because of scarcity of resources. Whether all available resources of a society are fully utilized is a highly significant question because answer to it would determine whether or not there will exist involuntary unemployment of labour as well as of capital stock. His theory of deficiency of effective demand causing recession and resulting in involuntary unemployment of labour and underutilisation of capital stock has played an important role in the formulation of economic policies to control fluctuations in economic activity. In recent years, the governments of the capitalist countries, like U.S.A., Great Britain have taken various steps to reduce inequalities of income and property and have accordingly tried to influence the distribution of national product. Therefore, it has to decide whether cloth is to be produced by handlooms or power looms or automatic looms. A person who owns a large amount of property will be enjoying a higher income. Whether all available productive resources of a society are being fully utilized, or are some of them lying unemployed and unutilized? It is worth noting here that the choice of technique of production is dealt with not only in microeconomic theory but is also an important issue in the theory of economic growth. There are three reasons for the economic problem:-. It makes choice among resources more important. Wants for those goods which society decides not to produce will remain unsatisfied. TOS 7. Prof. Amartya Sen, currently of Harvard University, has analysed the choice of technique as an important issue in economics of growth of the developing countries. Child labor and improper child welfare development 5. From the study it can be concluded that the biological and socio-economic causes oflow productivity are inter-related in NJAS 52-3/4, 2004 LN.A. Better understanding of the macroeconomics of the country helps to formulate correct economic policies and also coordinate with international economic policies. The Problem of Economic Growth: It is very important to know whether the productive capacity of an economy is increasing. Report a Violation, Problems Faced in Human Resource Planning, The Production Possibility Frontier (PPF): Assumptions, Characteristics and other Details. Lack of seasonal rainfall: Any abnormalities with the seasonal rainfall also can cause some serious poverty problems. Therefore, mainstream economic theory assumes free market system and explains how the above six problems are solved by it and with what degree of efficiency. 4. The greater the surplus, the higher the rate of investment and therefore the higher the rate of growth of output and employment. Economic competition between capitalist groups leads to the encroaching on the markets and resources of foreign rivals, and governments retaliate with tariffs, quotas, subsidies and other methods of excluding goods from the market. Disclaimer 9. Overpopulation is an undesirable condition where the number of the human population exceeds the carrying capacity of Earth. Keynes’ explanation was that unemployment of labour at that time was found not because money wages were fixed at higher levels by the activities of strong labour unions and intervention of the Government but because of the fall in aggregate effective demand for goods and services. Privacy Policy3. That is, what production methods are employed for the production of various goods and services? are limited in relation to their demand and economy cannot produce all what people want. An eminent economist. Therefore, the personal distribution of income is greatly affected by the distribution of the ownership of property. If the economy is producing wrong-mix of goods, then through reallocation of resources among them it will be possible to make some people better off without any one worse off. 9 causes of slow economic development in Pakistan. We shall, therefore, confine ourselves to the analysis of the theory of functional distribution which is an integral part of the microeconomic theory. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. What goods are produced and in what quantities by the productive resources which the economy possesses? The need of all the members of a society cannot be fully satisfied at any given time. Privacy Policy 8. Is the economy’s productive capacity increasing, declining or remaining static over time? Technological Efficiency: It is important to note here the difference between technological efficiency and economic efficiency. they can never be fully satisfied. theory of price) and will be explained in detail in the present work. The six questions listed above have been the concern of economic theory from time to time. Agricultural produce gets disturbed due to the absence of the predicted rainfall and hence causes inflation related poverty. Some of the main reasons for the existence of economic problems are given below: Resources (i.e. Dormon el al. There would have been no problem, if resources were not scarce. This macroeconomic theory has been greatly developed beyond the Keynesian perception in recent years and several alternative models of macroeconomics have been put forward. The problem of what goods are to be produced and in what quantities arises directly from the scarcity of resources. Why one method of production is used rather than another and consequences of the method used are dealt with in the Theory of Production. Besides, economists are also interested in preventing environmental pollution which occurs through reckless industrialisation and economic growth. In the 1800s, rural areas were more populated and preferred. Content Filtrations 6. all wants are not of equal intensity. Therefore, production with handlooms is a labour-intensive technique while production with automatic looms is a capital-intensive technique of producing cloth. But the need for balanced equilibrium growth rate in the developed capitalist countries on the one hand and the urge to remove mass poverty, hunger and chronic unemployment in the developing countries after their achievement of political independence have once again aroused the interests of economists in the problems of economic growth and numerous growth and development models have been put forward. The first and foremost basic problem confronting an economy is “What to produce” so as to satisfy the wants of the people. The theory of distribution viewed as the theory of pricing of factors of production is merely an extension of the theory of price or value. It is predicted that by 2030, urban areas would accommodate 65% of the entire human population. There are various alternative methods of producing goods and a society has to choose among them. No human being can satisfy all his needs completely. That is, a firm or industry or an economy is said to have achieved technological efficiency when it is having greatest possible rates of physical output from available inputs, given the existing technology. As said above, all of them arise from the fundamental problem of scarcity. It is worth remembering that all these fundamental questions arise because of the basic problem of scarcity confronting an economy. This branch of economic theory which deals with the problem of employment of resources (and thus with the determination of national income) is called Macroeconomic Theory. Therefore, it is in society’s interest that those methods of production be employed that make the greatest use of the relatively plentiful resources and economizes as much as possible on the relatively scarce resources. Are the use of productive resources economically efficient? are limited in relation to their demand and economy cannot produce all what people want. However, it is worth noting that till 1980s the concept of economic development generally implied the active intervention of the government and the public sector in the field of production. Had there been no scarcity, there would have been no economic problem. With the money coming in from oil in the late 1990s, Chávez established a number of social programmes in Venezuela known as the “Misiones” (Missions). Problems: Causes and Connections What are key environmental problems and their root causes? Cite this chapter as: Scorse J. 1. TOS4. 3. 6. Economic systems as a type of social system must confront and solve the three fundamental economic problems: Thus, with the given scarce resources, if the society decides to produce one good more, the production of some other goods would have to be cut down. Neo-classical growth models of Solow and Swan, Cambridge growth models of Kaldor and Joan Robinson etc. It decides which What does a society do when the resources are limited? Thanks to J.M. And, with the fall of communism in the USSR and East European countries and dismal experience of the working of public sector in the developing countries, the trend all over the world today is to adopt market friendly approach to development. What determines the allocation of resources and what are the results of attempts made to change the allocation has occupied the minds of economists from the very beginning of our economic science. Similarly, it has to decide whether the irrigation has to be done by small irrigation works or by large canals. By the year 2000, 47% of the total population started residing in urban areas. If the interests of the future generation are to be promoted, the resources, especially energy resources, have to be conserved and also if quality of life has to be improved, the environment has to be protected and saved from pollution. But the question which we raised, namely, “how the national product is distributed among the various individuals that comprise a society” is not fully answered by the theory of functional distribution. Share Your PDF File However, it is worth mentioning that in the scope of development economics today we are not only concerned with the promotion of growth of GNP (gross national product) and raising standards of material living of the people at the present but also with bringing out the adverse and disastrous consequences of depletion of natural resources. Prohibited Content 3. It is worth mentioning that economic theory has been mainly evolved and developed in the framework of capitalist institutions where free market mechanism plays a dominant role in solving the above basic problems. (1).Unlimited Wants:-. Copyright 10. Spurred by the bursting of the housing bubble, the financial and market crisis that began in 2007 has wreaked havoc on the global economy. Who should get how much from the total output of goods and services is a question concerning social justice or equity. The question of distribution of national product has occupied the attention of economists since the days of Adam Smith and David Ricardo who explained the distribution of national product between different social groups such as workers and capitalists in a free market society. The real fundamental causes are those that lie behind the assembling of the powder.’. (i) Unlimited Wants: A capitalist or free-market economy uses impersonal forces of demand and supply to decide what goods are to be produced and in what quantities and thereby determines the allocation of resources. For every individual, some wants are more important and urgent as compared to others. Chávez imported several thousand Cuban doctors to come and work i… Private ownership of the means of production is a sine qua non of the capitalist system. In view of the scarcity of resources to satisfy all wants of the people, it may look strange to ask a question whether or not all available resources of a community are being fully utilized. In the free market capitalist economies because of the large inequalities in the ownership of the property there are glaring inequalities of income. We shall explain below above six problems and questions in detail and see how they are related to the problem of scarcity. Share Your PPT File, Difference between Macroeconomics and Microeconomics. (2010) The Root Causes of Environmental Problems. Share Your Word File Human wants are unlimited but means to satisfy them are limited. These programmes aimed to tackle poverty and inequality and included clinics and other organisations to provide free health care; free educational opportunities; and training for individuals to become teachers. How is the total output of goods and services of a society distributed among its people? Now, the analysis of the factors on which the rate of economic growth depends has interested economists since the days of Adam Smith who in his book. Plagiarism Prevention 4. In a capitalist economy, decisions about the allocation of resources or, in other words, about what goods are to be produced and in what quantities are made through the free-market price mechanism. It is with this regard that the concept of sustainable growth or sustainable development has been put forward which implies that if severe damage is done to the environment and resources and if because of reckless industrialisation resources are not conserved for future, economic growth in the future will be limited. Economic Problems : The Causes Of Human Overpopulation. Yet, the government continues to borrow. As soon as one want is satisfied, another new want emerges. In: What Environmentalists Need to Know About Economics. Technological efficiency prevails when a firm, industry or an entire economy utilises its available resources fully and most effectively and thereby produces maximum possible output of goods and services with the given amount of resources. Economic Recession: Causes, Effects, and Possible Solutions Published on October 18, 2016 October 18, 2016 • 16 Likes • 2 Comments If the productive capacity of the economy is growing, it will be able to produce progressively more and more goods and services with the result that the living standards of its people will rise. An eminent British economist, J.M. The old division of factors into land, labour and capital is retained in modern economic theory but their old association with ‘social classes’, such as capitalist and working classes as was made by classical economists has been given up. Anti-competitive behavior, laws, and practices 2. We have noted above that economic resources are scarce relative to demand. Such was the case in erstwhile USSR before the collapse of communism in late nineteen eighties. Likewise, to initiate and accelerate the process of growth in developing countries, the various theories and models of growth and development have been offered. Keynesian analysis has greatly widened the scope of economic theory and improved our understanding of the working of the capitalist economic system which suffers from large fluctuations in economic activity. This physical relationship between inputs and outputs along with prices of factors goes to determine the cost of production. Commercial crimes and intentional or planned corporate offenses 6. Answer. As confidence recedes, so does demand. However, due to revolution and industrialization, people started migrating towards urban areas. , all human wants, an economy must choose among various goods and services and less capital as how... 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