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The Economic Problem

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I.B. Economics Andi Moll 29/03/2002 The Economic Problem About the Problem: The economic problem is simply that human beings have unlimited wants. These wants however cannot all be satisfied as the resources needed to satisfy these wants are scarce, limited. Since all wants cannot be satisfied, a choice has to be made of which wants come first. Made on the scale of preference the most pressing wants will be satisfied first, whilst some wants may not be satisfied at all, with the prevailing level of resources. This problem of choice can be sub-divided into three basic questions: What to produce, How to produce and for Whom to produce. The decisions of What, How and How much to produce made in Australia: What to produce Decisions about what to produce are formed by the individuals in a free market economy and partly by the government. Resources are scarce this is why a choice has to be made what to produce. For eg. The gov. will have to decide whether it wants to build more roads or build another school. ...read more.


This helps the consumer As there is a shortage of supply and the product can not be substituted the current supply will be rationed equally among the public. Although the good could also be a allocated by queuing in front of the retailers and the retailer's preference of to whom he will sell. Rationing is put in place to prevent riots from happening. A black market will most probably be established to sell the good at an illegally high price. By enforcing a minimum price the supplier is guaranteed a minimum price for his products, as well there is a minimum wage which is guaranteed for different kinds of labour. This helps the supplier. There is not a problem of scarce resources but competition for scarce customers. In addition to this the government involves itself by taking over some areas, for example defence. The Police is purely planned by the government. Although restaurants and other sorts of industries are run by the market. The amount of things controlled by the gov. ...read more.


Distinguish between Injections and leaks ? There are three main leakages in the circular flow of income model. Part of the income goes to savings, taxes, and spending on imports. Households save some part of their income into a bank or a pension fund. The gov. taxes incomes directly (income tax) and indirectly (ex. Sales taxes) Other income goes to abroad firms by buying imported products. However even though there are leakages in the circular flow of income model there are also injections. These injections are for one by firms who buy investment goods or capital goods (machines, factories). A second injection is by the government who buys goods and services (police cars). The third injection in to the model is when foreigners buy exported goods. What is their role in the determination of equilibrium ? In reality not all income earned by households is passed back to firms some part of income leaks out (saving, taxes, spending on imports). Although part of the income leaks out firms do receive spending flows (through exports, government, other firms). Therefore income might not be exactly equal to Consumer Expenditure. ...read more.

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