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With the aid of examples,explain the issues involved in the 'central economic problem',and evaluate how different types of economic system have attempted to resolve these issues.

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Introduction

IN013803 Economics Essay 23/04/03 With the aid of examples,explain the issues involved in the 'central economic problem',and evaluate how different types of economic system have attempted to resolve these issues. Word count 2,176 The basis of the central economic problem is the dilemma of what to produce,how to produce it and for whom to produce it for.Many economic systems have been applied,with these problems in mind,however,this essay is aiming to evaluate whether the practice of these systems do the theory justice. At one extreme is a free-market economy,or capitalism,which relies on the private ownership of its economic resources and the market system.At the other extreme is the command-economy(socialism,communism)which uses the public ownership of its resources and central planning.Economies in the real world lie between these two extremes and are hybrid systems,or mixed economies. Every day decisions are made as to how individuals and national economies use their available resources.The central economic problem is basically the fact that there are insufficient resources to satisfy all possible needs.Supply is finite,while demand is infinite. The use of scarce resources involves opportunity cost,which is the next best alternative.For example,the opportunity cost of using a certain raw material might be another raw material.Because resources are scarce and the opportunity cost is involved,society must make the most of the resources as they are being main(optimization),and decide ...read more.

Middle

The result of these grain sales was the death of over six million peasants in Siberia and Ukraine in 1932 and 1933.Another indication of the excessive control was the collectivization of farms in order to increase the states control over them. In this case,self-interest overlapped humanitarian sympathy,to the extent that the communist principle of working for the 'common good' was entirely ignored in favour of dictatorial greed. Command economies have had poor growth rates,especially in the past 20 years,despite reducing societal inequality.The reasons for this are the lack of choice and lack of economic freedom,resulting in a sever lack of competitional incentive. Low incentives discouraged any reasonable level of production and therefore downgraded the overall effectiveness of the command-economy.In conclusion,it can be said that despite with the aim to eradicate inequality this economy limits production to state owned companies,creating a monopolistic economy.What actually occurs is that there is no competition,so people lack long-term aims,become complacent,lack the will to work,and add to the many contributing factors of an inneffective economy. The evaluation of Stalin's regime dealt largely with the agricultural system of the Soviet Union at that time.A modern example of the failings of the command-economy is Romania.Central planning targets again proved unrealistic,leading to imbalanced imports and exports and lack of consideration for the local conditions. ...read more.

Conclusion

In a free-market economy the choice is not available to all as it may be out of financial reach for the poorest members of society.Markets tend to be oligopolistic in nature,however the domination by few large firms can also lead to the demise of many smaller firms creating a monopoly. Despite the restoration of incentives,there were failures of the US economy.The percentage below the poverty line was perhaps an indication of the increase in the rich-poor gap.The first half of the 1980's saw an increase from 24.5 million to 32 million.This proves that income and wealth inequalities are inevitable if incentives are to be increased.Many have questioned however,whether Reagan did more for the rich of America than the overall economic performance.These are some of the concerns which this strategy aimed to address,but unfortunately,they subsequently failed. Lying between free-market and command economies are hybrid economies like in Sweden.Both free-market and government planning allocate high proportions of resources.This balance though,is controversial.The dilemma is whether higher private spending power is more important than better public services. In conclusion it can be argued that in order to solve the central economic problem the free-market system is most effective,despite inequalities.The relatively poor performance of command economies illustrates that central control and organisation of an economy is impossible due to the increasing complexity within its structural framework. ...read more.

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