How do economic systems solve the problem of scarcity?

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HOW DO ECONOMIC SYSTEMS SOLVE THE PROBLEM OF SCARCITY?

Scarcity is not a new thing. Scarcity has always been with us and will be with us as long as we cannot get everything we want for free. Scarcity arises from the fact that resources (like land, labor and capital) are finite. Resources are the inputs used in the production of those things that we desire. Scarce resources are used to produce economic goods. Goods produced from scarce resources are also scarce. Thus, we constantly face decisions about how best to use them. Every economy has to decide 1) What will be produced? 2) How will it be produced? 3) For whom will it be produced?

Scarcity forces us to choose. In fact, the concept of choice forms the basis of economics. Moreover, the choices that we can make are constrained not only by scarcity but also by political, legal, traditional and moral forces. In other words, there are numerous non-economic forces also that determine and mold our decision making process. When a choice is made, some other thing that is also desired has to be forgone. In other words, another possible opportunity has to be missed or forgone, i.e. there is an opportunity cost. We have to make trade-offs.

The choices and trade-offs that we make determine the possible results that can be produced and give us the production possibilities curve. Societies that we live in also have to make such choices and trade-offs between the different types of goods (consumption goods and capital goods or alternatively current consumption vis-à-vis future consumption) it will produce.

Economic systems comprise of all institutional means through which national resources are used to satisfy human wants. Institutional means includes the laws of the nation and also habits, ethics and customs of its society.

There are three different types of economic systems:

> Capitalism or Laissez-faire economy

> Command economy

> Mixed economy

Each of these three economic systems has their own ways of addressing the problem of scarcity and face opportunity costs in making decisions.

a) A laissez faire economy, also known as capitalism, is an economic system in which individuals or group of individuals privately own productive resources and possess property rights to use these resources in the manner they choose, subject to certain legal restrictions. The USA and Hong Kong are new examples of market economies where firms decide the type and quantity of goods to be made in response to consumers needs. An increase in the price of one good encourages producers to switch resources into the production of that commodity. Consumers decide the type and quantity of goods to be bought. A decrease in the price of one good encourages consumers to switch to buying that commodity. People with high incomes are able to buy more goods and services than those who are less well off.
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Capitalism solves the problem of scarcity by decision-making by private individuals. If a producer sees that the material of making a certain product is getting scarce, they will increase the price or reduce supply or both. When price increases, generally supply rises and demand falls till a balance between demand and supply is reached once again. When a producer has excess materials for a certain product, it will increase supply and reduce price. A market economy solves it problems of scarcity by increasing and decreasing price and supply. Competition is also the mechanism that obliges firms to seek ...

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