UNIT 1: MARKETS and MODELS - Topic 1 The basic economic problem RESOURCES

WANTS and NEEDS used by producers to

of consumers produce goods/services

BUYERS
(consumers)
TYPES: TYPES:

- recurrent OUTPUTS `factors` of production

- complementary MARKETS of production `factor`
- competitive (substitute) exchange at INPUTS - land (natural)
- changeable (intensity varies) an agreed - GOODS to production - labour
- luxury PRICE - capital
- SERVICES PRODUCTION - enterprise
- individual (private)
PROCESS
- collective (public)
SELLERS
(producers)
TYPES of g/s

UNLIMITED LIMITED
relative to the CONSUMER CAPITAL SEMI-FINISHED FINISHED INDIVIDUAL COLLECTIVE & have
resources available - single use (producer) (intermediate) (final) (private) (public) alternative uses
to satisfy them - durable

ECONOMIC PROBLEM
(relative scarcity)
Insufficient resources
to satisfy consumers
unlimited wants/needs

degree of scarcity varies over time (dynamic) and geographically CONSUMERS` degree of scarcity varies over time (dynamic) and geographically
`life cycle`

2020
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 ECONOMIC PROBLEM
(relative scarcity)

Can be viewed at different LEVELS:

ECONOMIC Individual level

DECISION-MAKING Household level
Business level
Government level
International level
CHOICES have to be made
- about what ?

Use of (allocation) of limited

resources to satisfy unlimited
wants and needs

a `scale of the `opportunity

Any ECONOMIC DECISION cost` involved
preferences` should consider:

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 Aim to achieve EFFICIENCY in the
use of limited resources

- ALLOCATIVE efficiency
- PRODUCTIVE (technical) efficiency

Resource use that MAXIMISES the satisfaction

of consumers and producers wants and needs

(ie. achieve a higher STANDARD of LIVING)

ECONOMICS is a social science that studies consumer and producer decision-making behaviour in their
attempts to allocate limited resources to maximise the satisfaction of their unlimited wants and needs.

- consumer and producer behaviour is `dynamic` (ever-changing)

- economic laws developed about consumer and producer behaviour (eg. Laws of DEMAND & SUPPLY)
- economic models used to help explain consumer and producer behaviour

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 ECONOMIC PROBLEM
(relative scarcity)

Faced as:

Individual Collective groups of consumers

consumers (households, businesses, governments and the world)

Organisational framework required to

ECONOMIC SYSTEM make collective decisions

Collective DECISION-MAKING:

FOUR basic questions about production

WHAT g/s HOW MUCH g/s that must responded to: HOW FOR WHOM
to produce ? to produce ? to produce ? to produce ?

COMPOSITION VOLUME METHOD DISTRIBUTION

of production of production of production of production

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 Models of ECONOMIC SYSTEM

TRADITIONAL or PRIVATE ENTERPRISE SOCIALIST

SUBSISTENCE model or MARKET model COMMAND model

FEATURES: FEATURES: FEATURES:

- little ownership of resources (nature)
- no enterprise/consumer decision-making
- motivation to contribute factors to production is
for daily survival
- production is geared for subsistence
- absence of formal markets and money (barter)
- custom/traditional ways used to allocate
resources (what, how much, how and
for whom ?) and limited by what is available
in the natural environment.
- strong private ownership of resources
- freedom of consumer decision-making/freedom of enterprise
- motivation to contribute factors to production is self-interest/profit
- production is geared for surplus and market exchange
- sophisticated markets/money system developed for
trade/exchange
- use of the prices (market) mechanism to allocate
resources (what, how much, how and for whom ?)
where consumer sovereignty (dollar votes) is paramount
DECENTRALISED decision-making
- mostly social ownership of resources
- little freedom of enterprise/consumer decision-making
- motivation to contribute factors to production is for the
social/state good
- production is geared for social/state plans or targets
- limited markets developed for exchange/use of
vouchers/coupons for rationing
- state / social control /direction to allocate resources
(what, how much, how and for whom ?)
CENTRALISED decision-making

How does each economic system respond to the basic questions about PRODUCTION as a collective group ?

COMPOSITION VOLUME METHOD DISTRIBUTION

of production of production of production of production

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TRADITIONAL or
SUBSISTENCE model
ADVANTAGES and DISADVANTAGES?
MARKET model strengths
1. Encourages an efficient allocation of limited resources
2. Encourages a greater volume & variety of goods & services,
and wider consumer choice
3. Encourages more competitive pricing of resources (g & s)
4. Encourages incentive for continual method / product innovation
and improvement
5. Market is flexible and adaptable, and is therefore readily able to
change to dynamic conditions affecting demand & supply
6. Market is decision-making is self-regulating (decentralised).
Little need for government control.
7. Allows for a high degree of personal & economic freedom
Economic convergence and globalisation
Models of ECONOMIC SYSTEM
PRIVATE ENTERPRISE SOCIALIST
or MARKET model COMMAND model
ADVANTAGES and DISADVANTAGES? ADVANTAGES and DISADVANTAGES?
MARKET model failures
1. Fails to provide some socially desirable public g & s (or in
sufficient quantity/quality or affordability) eg. defence, education,
health, water supply, electricity, roads, railways, parks, libraries, cultural amenities,
telecommunications etc.
2. Neglects `merit` goods and services (eg. cultural amenities, libraries, art,
orchestral performances, opera, heritage, ballet, theatre, natural ecosystems)
3. Supports `demerit` goods and services (eg. alcohol, tobacco smoking, gambling,
illicit drugs, junk foods, firearms, prostitution, dog fighting/racing)
4. Tends to distribute incomes unequally (unfairly)
5. The market makes little attempt to limit the `social` costs (externalities)
associated with production (eg. air pollution, land degradation, water pollution, climate
change, waste of obsolete technology, obesity)
6. Market system encourages the development of market concentration
(monopolies - one seller)
7. Assumes market participants have `perfect knowledge` of the market
8. Market activity tends to lead to severe unpredictable fluctuations in
the aggregate level of economic activity. - GDP (`boom` - `bust` cycles)
giving rise to economic problems of severe inflation or unemployment.
Contemporary economies mostly `modified` or `mixed` economies