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The Function of an economy.

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Introduction

The Function of an economy: An economy is a system, which attempts to solve the basic economic problem. In a national economy the resources in a country are changed by business activity into goods and services, which are bought by individuals. In a household economy the family budget is spent on a range of goods and services. Local and International economies also act in the same way, but at different levels. The function of an economy is to allocate scarce resources amongst unlimited wants. The basic economic problem is often broken down into three questions: * What should be produced? * How should it be produced? * For whom should it be produced? What should be produced? In developed economies the number of goods and services produced from resources is immense. The economic system must decide which resources will be used to produce which products. For example, what proportion of the resources should be used to produce food, cars, housing, cigarettes, cosmetics, computers, etc.? Should resources be used for military purposes? Should resources be used to generate wealth for the future? ...read more.

Middle

iii. Higher rate of capital formation: people can save a part of their income so that it can be invested to earn more income and leave larger properties for their heirs. The rate of capital formation increases when savings are invested. This accelerates economic growth. iv. Economic Development and prosperity: It is argued that free market will lead to larger, better-quality outputs at lower unit costs. Capitalism offers great incentive for saving and large opportunities for investment. It encourages innovation and technological progress and the optimum use of resources. v. Optimum utilization of resources: Every producer and entrepreneur tries to use the resources at his disposal in the most economical manner in order to maximize profits. Otherwise, businesses may suffer higher costs and losses or even bankruptcy or their miscalculations. vi. Just system: a man who takes the initiative and shows extra ordinary resourcefulness makes the highest profits. vii. Democratic: In a capitalist economy, individuals have greater freedom to make their own supply and demand decisions. Consumers buy what they like and not what is supplied to them. ...read more.

Conclusion

packets, if they feel their jobs doesn't fulfill for factors such as self-respect, pride in the job and the ability to work at one's own pace. v. Many decisions are made by consumers with an imperfect knowledge of the market. Producers frequently change the details of their products including price, shape, size and packaging. This makes it very difficult for consumers to weigh up alternative purchases, and many decisions are made by impressions rather than hard evidence. vi. Many resources can be wasted due to a high failure rate of new businesses. A lot of time and money is spent on setting up a new business. When it closes down after a few months, many of its resources may end up as little as scrap. vii. Merit goods such as education and health may not be available to all, which can be harmful to the economy and society. viii. Monopolies may occur which are often bad for consumers. Big monopolies can control the market, squeeze out competition and set prices of their own liking. Private producers will ignore the bad effects of external costs of their activities, such as pollution, if they are allowed complete freedom. ...read more.

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