An Explanation Of Market Forces - Assignment Example

There have been a number of phrases, which define the term “economics”, the most modern and widely used of which is as follows; “the science which studied human behaviour as a relationship between ends and scarce means which have alternative uses”. Quoted by L. Robbins during the 1930’s, it takes the bias of the neo-classical approach as opposed to one of a more typically classical economist. (A.G. Anderton, 1992: 289).

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The subject of economics is too large to comprehend sometimes. I intend to merely skim the surface on various topics within the field of economics.

Talking About Fundamental Economic Problems

Just as in politics, the term “economic” tends to be used in a variety of ways and contexts in order to describe certain aspects of human behaviour, ranging from activities such as producing, distributing and consuming, to the idea of frugality in the use of a resource. Modern definitions stress how such behaviour, and the institutions in which it takes place (e.g. households, firms, governments, banks), are concerned with the satisfaction of human needs and wants through the transformation of resources into goods and services which are consumed by society. These processes are said to take place under conditions of “economic scarcity”. (Worthington & Britton, 2000: 82).

The economist’s idea of “scarcity” centres around the relationship between a society’s needs and wants and the resources available to satisfy them. In essence, economists argue that whereas needs and wants tend to be unlimited, the resources, which can be used to meet those, needs and wants are finite. The assumption here is that both individual and collective needs and wants consistently outstrip the means available to satisfy them, as exemplified, for instance, by the inability of governments to provide instant health care, the best roads, education, defence, railways, and so on.

This being the case, “choices” have to be made by both individuals and society concerning priorities concerning resources, and every choice inevitably involves a “sacrifice” (i.e. forgoing an alternative). Economists describe this sacrifice as the “opportunity cost” or “real cost” of the decision that is taken (e.g. every pound spent on the health service is a pound not spent on some other public service) and it is one, which is faced by individuals, organisations (including firms), governments and society alike. (Worthington & Britton, 2000: 82).

Because resources are scarce or finite, and human wants are infinite, society has to construct economic systems to resolve the resulting conflict. There are three aspects to this conflict:

1. An economic system has to decide what to produce. In what proportion will it produce cars, or nuclear bombs, or flower pots? (Refer to appendix, 1.1).

2. It has to decide how to produce its goods and services. In what proportion will it use labour or machines, for instance? (Refer to appendix, 1.2).

3. It has to decide for whom production is to take place. Will 1% of the population take 90% of all production, or will the allocation of production be more equitable? (Refer to appendix, 1.3). (A.G. Anderton, 1992: 289).

In the appendix I have included three diagrams, illustrating each point above.

Solving Economic Problems

In practice, of course, these problems tend to be solved in a variety of ways, including barter, price signals and the market, queuing and rationing, government instruction and corruption (e.g. resources allocated in exchange for personal favours). Normally, however, one or other main approach to resources allocation tends to predominate and this allows analytical distinctions to be made between different types of economic systems. One important distinction is between those economies, which are centrally planned, and those, which operate predominately through market forces, with prices forming the integrating mechanism. (Worthington & Britton, 2000: 82).

– Factors Of Production

A factor of production is an input to the production process, which yields a consumable good or service. Traditionally, economists have distinguished three (sometimes four) factors of production. Land embraces not only agricultural land or urban land, but all natural resources. Meaning fish, natural forest, or fresh air, are classified by the economist as land. Labour is the human input, from poet and peasant to Prime Minister and country parson. Capital is the stock of existing goods used to produce other goods. Machines and buildings are the main types of capital.

A fourth factor of production, entrepreneurship, is sometimes distinguished. An entrepreneur is a person who risks their own capital in producing goods or services for the market. Risk-taking and organising production are the two key elements of the entrepreneur’s role.

Each factor of production receives a payment or return: land receives rent, labour receives wages, capital receives interest and entrepreneurship receives profit. (A.G. Anderton, 1992: 274).

Free Markets And How They Operate

The free-market (or capitalist) economy stands in direct contrast to the centrally planned system. Whereas in the latter the state controls most economic decisions, in the former the key economic agencies are private individuals (sometimes called households) and firms, and these interact in free markets, through system of prices, to determine the allocation of resources.

The key features of this type of economic system are as follows:

* Resources are in private ownership and the individuals owning them are free to use them as they wish.

* Firms, also in private ownership, are equally able to make decisions on production, free from state interference.

* No blueprint (or master plan) exists to direct production and consumption.

* Decisions on resource allocation are the result of a decentralised system, of markets and prices, in which the decisions of millions of consumers and hundreds of thousands of firms are automatically co-ordinated.

* The consumer is sovereign, i.e. dictates the pattern of supply and hence the pattern of resources allocation.

In short, the three problems of what to produce, how to produce and how to distribute are solved by market forces. (Worthington & Britton, 2000: 84).

– Government Intervention

In considering reasons for government intervention in the economy, economists have traditionally pointed to the problem of “market failure”.

The key areas of “market failure” are well known. Primary concerns include the following:

1. The unwillingness of markets to produce goods and services which are either unprofitable or which it is not practical to provide through private means. (I.e. “public goods”. E.g. defence, social services).

2. The likely under-provision of certain goods and services felt to be of general benefit to the community. (I.e. “merit goods”. E.g. education, libraries).

3. The failure to take into accounts the external costs and benefits of productions or consumption. (I.e. “externalities”. E.g. pollution, congestion).

4. The danger of monopoly power if businesses can be freely bought and sold.

5. The under utilisation of economic resources. (E.g. unemployment brought about by decrease in demand).

6. The tendency for output to be determined and distributed on the ability to pay rather than on the basis of need or equity.

Government responses to these problems have normally taken a number of forms, including public ownership, legislation and administrative or fiscal regulations.

Government intervention in the economy when concerning industrial and commercial environments are sometime called “industrial policies”. These policies have included the following:

* Attempts at direct industrial intervention.

* Privatisation policies.

* Policies relating to competition and monopoly control.

* Policies designed to influence industrial location and to encourage economic regeneration at different spatial levels. (Worthington & Britton, 2000: 84).