- What, how and for whom to produce?
This is the main question which circulates the mind of every producer, and yes you guessed it right! It’s largely thanks to the scarcity of resources. Since resources aren’t abundantly available, this question becomes all the more important.
-What to produce: Of course, using a few inputs, various outputs can be produced. For example I can use wood to make paper and I can also use it to make fence. So then what should I produce? This involves choosing which wants to satisfy.
-How to produce: The best and most effecient ways of production should be used to ensure to that the costs are low plus the wastage is minimum. For example a producer may have to decide whether to employ more labour or more capital. He’ll then make his choice by weighing the two options.
– For whom to produce: When the question of what to produce and how to produce have been answered a final problem remains. Because of scarcity not every person’s wants can be satisfied so it must be decided whose wants to satisfy. In other words, it must be decided who gets the goods and services that have been made.
- Market systems:
– Free market systems
This is the market system which relies upon the producers and the consumers to make the decisions about what, how and for whom to produce. Government doesn’t intervene.
- i) The free market system responds quickly to people’s wants. If people want a good or service for which they can pay, it becomes profitable to make it and resources are quickly sent to the market to produce such goods and services
- ii) The market produces a wide variety of goods and services to meet consumer’s wants.
iii) The market system encourages the use of new and better methods and machines to produce goods and services, since the producers want to keep the cost of production low and make it efficient.
- iv) The market system relies on producers and consumers to decide what, how and for whom to produce and so there is no need to go to the expense of employing a group of people to take these decisions.
- i) Factors of production will be employed only if it is profitable to do so, since profit making is the main agenda of producers in a free-style market economy. For example labour is just another factor of production, and one reason why some people are unemployed today is that it is not profitable to employ them.
- ii) The free market can fail to provide certain goods and services. For example those goods which have more social benefits* then private benefits* (*we will study these terms later on). Such goods include street lights, military force etc.
iii) The free market may encourage the consumption of harmful goods. Once again the greediness of the producers to earn more profit may encourage them to sell harmful goods wanted by the public. Examples include cigarette, heroin etc.
- iv) The social effects of production may be ignored. Such social effects include pollution of air, water, land and noise. The producers only care about the profit that they have to make and so they hardly care about the environment around them. For example they don’t care about the emissions from their plants which may cause pollution.
- Mixed economic system
In this system, the government planning is combined with the free market economic system.
Why have a mixed economic system?
- i) Market economies experience high unemployment sometimes because it may not be profitable to employ people. In a mixed economy if there is unemployment the government may be able to create jobs for those people out of work, by employing them in their own offices and factories.
- ii) Public goods, such as defense, law and order is not provided by the private firms. Government can provide these public goods and raise money by taxing people’s income and spending.
iii) Government also provides merit goods such as health and education for free/low costs.
- iv) In a mixed economy, a government may be able to stop people for consuming harmful goods by making them illegal, for example hard drugs.
- v) A government may use laws or high taxes and fines on firms to try and prevent them from unfair practices or polluting the environment.
- vi) Planning gives the government the power to give goods and services and , or more money, to the people that it think needs them.
Q1. Name a country which is closer to the free market economic system?
Ans. Singapore is one of the those rare countries which are more inclined towards the free market economic system. Their market largely works on consumer demand, and they are also trying to promote this system on a global level. That probably explains why it has a free port!
Q2. Why is a Government better placed to provide such resources to the population, which private firms hesitate to provide?
Ans. A mixed economy attempts to overcome the disadvantage of a market economic system by using government intervention to control or regulate different markets. Government ownership of some of the scarce resources allows it produce goods and services for those people it thinks deserves them. However, if a government provides goods and services it covers up the cost of doing do by raising taxes from people and firms. Private firms do not usually enjoy a liberty as large as that of the government. That is why government is better placed to run such a system.
FOR Further reading:
Read Chapter 3 of the Book ‘Economics by Brian Titley’