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How do economic systems solve the problem of scarcity?

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Introduction

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-�-vis future consumption) ...read more.

Middle

The government sets output targets for each district and factory and allocates the necessary resources. Incomes are often more evenly spread out than in other types of economy. The government in a command economy tries to solve the problem of scarcity by only producing the goods that they assign priority to and thus depriving the individuals in the society from being able to satisfy some of their other wants. In a command economy, the government, by deciding what the country needs and only using the resources, which are necessary, solve the problem of scarcity. If a resource becomes scarce they may not produce any more of that good and switch to an alternative good. The government decides what to produce and allocates the resources according to its decisions. Another method the governments use to solve the problem of scarcity is by raising prices, but they must make sure that even the poorest consumers can afford to buy it. It can also ask certain firms to increase their production of scarce resources or to expand (using more factors of production). During times of war, when resources are scarce, governments use the method of rationing for giving the minimum essential goods to its people. c) A mixed economy is an economic system in which there is a mixture of ownership of resources and decision-making by both private individuals and the government. Thus, decisions about how resources should be used are made partly by individuals and partly by the government and other institutions in the public sector. ...read more.

Conclusion

Another problem that can arise is when free markets try to control the price barrier. By doing this it can lead to the formation of illegal markets and sales. This could then become part of a black market, which could also overall increase crime. If a government decides to turn its economy into a mixed or free market economy (like Russia in the "Planning becomes a nightmare for Moscow" article), it will have to sell and privatize many of the companies. This could lead to inefficiency and a lot of misunderstanding. Planned economies have limited solutions but a large number of problems. Since mixed economies are made up of both free market and command economies, they also face many problems because the solutions that they decide upon may work only for one side of the system and be damaging to the other side. They may over allocate resources to one sector or they may intervene too much in another sector. A mixed economy is never stable as it is always moving form being either more free or to being more controlled by the government. There can be prolonged debates on the desirability of public ownership or privatization of the key sectors of the economy on political and economic grounds. In conclusion, when economic systems solve a problem like scarcity, they usually create other problems for themselves. They have to look for the best solutions, which will produce fewer problems. No economic system is perfect there will always be errors in their solutions but even though they cannot be perfect, they can always try to get better. ...read more.

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