Shima

INTRODUCTION | 2 | Basic concept of economics | 2-3 | economics problems | 3-4 | Mixed economics | 5 | Socialism | 6-8 | Capitalism | 8-12 |

Introduction

Adam smith defined the subject matter of economics as the study of the causes of material welfare or as the science of wealth. Alfred Marshall in particular defined economics as the study of production, consumption, exchange and distribution of wealth by men engage in the ordinary business of life. Robinson however defined this subject matter as too restricted in scope to embrace all the facts. According to Robinson "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses". A satisfactory definition must combine both these conception of economics. We may define economics as social science concerned with the proper use and allocation of scarce resources for the achievement and maintenance of growth and stability.
Introduction
Adam smith defined the subject matter of economics as the study of the causes of material welfare or as the science of wealth. Alfred Marshall in particular defined economics as the study of production, consumption, exchange and distribution of wealth by men engage in the ordinary business of life. Robinson however defined this subject matter as too restricted in scope to embrace all the facts. According to Robinson "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses". A satisfactory definition must combine both these conception of economics. We may define economics as social science concerned with the proper use and allocation of scarce resources for the achievement and maintenance of growth and stability.

Basic Concepts of Economics
Basically there are 6 basic concepts of economics. These are:
1) Ends/wants: These are goods and services, which are desired for consumption. Goods include things like foods, houses, books, etc. while services hairdressing the service of an actor etc.
2) Means/Resources. These refer to basic instruments with which human wants can be satisfied. Resources include the productive resources such as lands labour, capital and entrepreneur, which are used in production of goods and services, in short human ends/wants are many and the resources to satisfy them are limited/ scarce
3) Scarcity. This is the fundamental or basic economic problem. Human wants/ends are unlimited as a result of scarcity of resources. In other word scarcity refers to the inability of human beings to provide themselves with all things. However, economic goods are scarce (Limited in supply) in relating alternatives. This scarcity is the root of economics.
4} Choice this refers to distribution of our scarce resources among different economic ends. When we have chosen or selected one thing we have to sacrifice some other things because our resources may not be sufficient to satisfy both at the same time. Thus choice arises because of scarcity of resources.
5) Scale of preference. In order to achieve maximum satisfaction with limited resources at disposal, individual, firm, and government arrange their unlimited wants in order of relative importance and this is called a scale of preference. Thus, different economic agents make efficient use of scarce resources to meet up their numerous wants or production needs as a result of arrangement of their wants in order of preference. Therefore, the agents choose those that give the highest utility.
6) Opportunity cost. This is the forgone alternative. The concept of opportunity cost i.e. (real cost) which is the alternative forgone when resources are directed to the satisfaction of one wants rather than the next alternative uses.

Nature of Economic Problems
The main problem of an economy is that of economizing resources: in this sense economics is the study of the allocation of scarce resources and alternative ends. In other words the fundamental problem of economics is scarcity. Human wants are unlimited and the means to satisfy them are scarce and limited. Thus, economics is concerned with problem of using resources to meet the unlimited wants of human beings. The solution to these problems of allocation scarce resources lies in the price system, which exists in every economic system whether it is capitalism, socialism or mixed economy. In an effort to solve these problems an economist is pre-occupied with the following different questions:

Ways Economics system solve their economic problems
What to Produce and in What Quantity: The first central problem of an economy is to decide what goods and services are to be produced and in what quantity. This involves the allocating of scarce resources in relation to the composition of total output in the economy. Since the resources are scarce, society has to decide on the goods to be produced.

How to Produce: The next problem of an economist is to decide on how to produce goods and services with what combinations and what method of production. This method is primarily dependent upon the available resources within the economy. Further, goods and services can be produced with different combinations of factors of production. If land is available in abundance it may have extensive cultivation. But if land is scarce, intensive method of cultivation may be used. If labour is in abundance it may be labour intensive techniques while in the case of labour shortage, capital-intensive technique may be used.

For Whom to Produce: This is the allocation of goods among the members of the society. How should the consumer goods be distributed, How should the capital goods be distributed? The allocation of consumer goods among the household takes place on the basis of exchange.

Socialism
Mixed Economy
Capitalism
Economic system

Mixed Economy
Mixed economy is combination between capitalist and socialist economy. It is an economy system where price mechanism and economic planning authority are used simultaneously. Hence there are both private and public ownership of means of production and distribution. Household and firms and some other take some decisions by planning authority.

CHARACTERISTICS OF MIXED ECONOMY 1. Publics and private ownership of resources 2. Price mechanism and economic plans in making economics decisions 3. Government helps to control income disparity 4. Government intervention in the economy 5. Co-operation between the government,publics and business sectors 6. Government control of monopolies

Features of Mixed Economy
1) Public sector: all decision regarding what, how and for whom to produce is taken by the state. Public utilities such as road construction, power supply, water supply are in the side of public sector. These public utilities are operating for societal welfare maximization not for profit motives.
2) Private sector: There is private sector in which production and distribution of goods and services are carried out by private enterprise. Profit motive is the guiding principle in this sector.
3) Joint sector: there is joint sector where both state and private jointly run enterprise. It is organized on the basis of a joint stock company where majority of shares are held by the state.
4) Freedom and control: in mixed economy there is every freedom to own private property, earn profit, to consume, produce, distribute and to have any occupation of choice without limitations until and unless such possessions have an adverse effect on public welfare so that state intervenes in order to control and regulate the situation.
5) Economic planning: There is a central planning authority in a mixed economy. In this system, economy operates on basis of some economic plan. All sectors of economy function in accordance with the objectives, priority and targets laid down in the plan.

Advantages of Mixed Economy
1) Best allocation of resources: since mixed economy incorporate the goods features of both capitalism and socialism, the resources of the economy are utilized in best possible manner.
2) General balance: mixed economy maintains a general balance between the public and private sectors. There is competition as well as co-operation between the two sectors which is conducive atmosphere for achieving a high rate of capital accumulation and economic growth.
3) Welfare state: mixed economy contains all the features of the welfare state that provides social services such as health care, unemployment pay etc. to people who need them. Therefore, there is no exploitation either by the capitalist under free enterprise economy or by the state under centrally planned economy.
4) Stability: it ensures stability by reducing high unemployment and income inequality associated with capitalist economy.

Disadvantages of Mixed Economy
1) Non-cooperation between the two sectors: experience has shown that in mixed economy private and public sector do not see eye to eye with one another. They are at loggerhead because of their disparity in motives and as such they are not cooperative with one another.
2) Inefficient public sector: public sector of mixed economy is a bit burden on economy because it works inefficiently. The bottlenecks, which militate against efficiency of public sector, are bureaucratic control, over staffing of personnel, red-tepism, corruption, and nepotism among others. These bring about decline in production and huge loss.
3) Economic fluctuation: The experience of the working of mixed economic system in developed countries also reveals that they have not been able to remove economic fluctuation.

Socialism
This is an economic system where the state takes the major economic decisions through detailed planning. Countries that adopt this system do not believe in the efficacy of market forces. Production and distribution of goods and factors of production are done by state under the directives of planning authority. The decision as what to produce, how to produce and for whom to produce are taken by the planning authority that is why socialist economy is also called a plan economy.

Characteristics of socialism 1. Publics ownership of resources 2. Central planning authority 3. Price mechanism of lesser importance 4. Central control and ownership

MERITS OF SOSIALISM 1. Production according to basic needs 2. Equal distribution of income and wealth 3. Better allocations of resources 4. No serious unemployment or recession/inflation 5. Rapid economic development 6. Social welfare

DEMERITS OF SOCIALISM 1. Lack of incentives and initiative by individuals 2. Loss of economics freedom and consumers sovereignty 3. Absence of competition 4. Waste of economics resources

ECONOMICS DECISIONS IN A SOCIALISTIC SYSTEM 1. WHAT TO PRODUCE 2. HOW TO PRODUCE 3. FOR WHOM TO PRODUCE

Features of Socialism
1) Public ownership of means of production and distribution: This implies that all firms, financial institutions. Distributing agencies, means of transportation and communication etc. are not only owned but also controlled and regulated by the government department and State Corporation. The objective if socialist economy is societal welfare not profit as in case of capitalist arrangement.
2) Central planning: There exists a central planning authority, which formulates a comprehensive economic plan for the national economy. The intended objectives and targets are spelt out and major economic decisions regarding what, how, for whom to produce are made by planning authority.
3) Definite objective: Socialist economy operates within definite economic objectives and these may concern aggregate demand, full employment, and satisfaction of communal demand, distribution. Of national income, the amount of capital accumulation etc. in attempt to achieve these objectives necessitates formulation of plan that defines priorities and targets, which covers all aspects of the economy.
4) Freedom of consumption: Under socialism consumer's sovereignty implies that government in line with the preference of consumer generally owns production and the available commodities are distributed to the consumers at fixed price through the state.
5) Equality of income distribution: In socialist economy, there is great equality of income distribution because of absence of private ownership of means of production, private accumulation of capital and profit motive.
6) Planning and the pricing process: pricing process is under the watchful eye of the government who has power to control and regulate prices. Planning is the system of managing economic process involving production, investment and consumption. It is essence consists in determining economic targets and method for their implementation, planning and pricing complement one another in a socialist economy such that the two work towards the realization of known objectives.

Advantages of Socialism
1) Greater economic efficiency: central planning authority makes an extensive survey of resources and utilizes them in most efficient manner thereby avoiding wasteful competition. Societal welfare is maximized by producing socially useful goods and services which satisfy the basic wants of people such as food; shelter and clothing these enhance economic efficiency.
2) Greater welfare: There is less inequality of income because all citizens' work for welfare state (socialist economy) is paid their remuneration according to their ability, education and training. All rents, interest and profit received by state are expended for improving public welfare through provision of free education, housing, free public health services, social security to public etc.
3) Absence of monopolistic practice: There is state monopoly rather than private monopoly and as such undue and unnecessary exploitation of monopolistic private individual is avoided and thus improvement in standard of living of masses.
4) Absence of business fluctuation: Central planning authority controls and regulates production and consumption of goods and services in accordance with objectives and target of plan. This ensures economic stability and reduces the chances of overproduction and employment.
5) Prevention of certain forms of economic waste: Free enterprise capitalism is noted for its wasteful use of resources examples are, unnecessary product differentiation, unwarranted fragmentation and duplication of equipments and services, excess employment in sales promotion, misleading advertisement, conspicuous consumption etc. such forms of waste are virtually absent or can be easily prevented under socialism.

Disadvantage of Socialism
1) Loss of consumer's sovereignty: Consumers do not have freedom to buy commodities they want. They consume only commodities, which are provided by the central authority.
2) No freedom of occupation: Every individual is provided a job by the state but he cannot leave or change it.
3) Misallocation of resources: Central planning authority often commits mistake in allocation of resources because the entire work is carried out on trail and error basis.
4) Bureaucratic: A socialist economy is said to be a bureaucratic economy because it operates like a machine and hence does not provide the necessary initiative to the people to work hard. People work for fear of high authority not for any personal gain or self interest.
5) Emergence of state monopoly: Socialism leads to state monopoly of means of production which gives rise to ineffective and inefficient production and distribution of goods and services due to bureaucracy and misallocation of resources.

Capitalism
Capitalism or free market economy is an economic systemwhere individuals make all the main economic decisions without any government intervention.in this market,buyers and seller will meet and enter into transactions.the price system is the main mechanism for any economic activity.this economy is characterized as economic freedom,where an individual can be a buyers,seller,employer at his/her own wish and without any governmental control.this system also known as laiser-faire,market economy or free enterprise.It is an economic system in which individual in his capacity as a consumer, producer and resources owner is engaged in economic activities with substantial economic freedom. Individuals economic action conform to the existing legal and institutional framework of the society which is governed by the institution of private property, profit motive, freedom of enterprises and consumer sovereignty under such an economic system, all factors of production are privately owned and managed by individuals.

characteristics private ownership of resources
Every individual in the country has a right to acquire private ownership of resources.private individual or private institutions can own resources.they can accumulate property and use it as they choose.for example,if Amin wants to buy a bungalow in Taman Desa,he can purchase the property if he has sufficient money.Amin can also buy more properties depending on his purchasing power.There is no restriction on the number of properties Amin can own .there is freedom to own private property.However,all governmental laws and regulations must be followed in the process. There are also certain public facilities provided by the government for public usage such as roads,clinics,and school.

Freedom of enterprise and choice
Individuals are free too own resources as well as to establish any enterprise of their choice.they are free to trade,invest,and organize to produce within the country’s legal framework for example, if john want to open his own busineess selling mobile phones,he has the economics freedom to operate this business.

Consumer’s sovereignty
In capitalism,consumer’s sovereignty plays an important role.consumer’s tastes and preference will affect the production of goods and services.producers have to produce goods and services to meet consumer’s tastes and preferences,otherwise they will be unable to sell what they produce.

Competition
A market economy is also characterized as being highly competitive among producers who aim to obtain the highest profit.when producers compete among themselves,the product will be high quality and there is also greater efficiency.for example,in the production of shoes,brands such as ADIDAS,NIKE,REEBOK, are in constant direct competition.in order to attract more consumers,both producers use various marketing strategies to maximize sales of their product.

Government intervention
In capitalism,therethere is very limited government intervention.The country’s role is to stabilize the economic conditions of the country.

Price system
The price mechanism is a system used to make economic decisions.price mechanism means the free operation of demand and supply forces without any intervention.All economic processes of consumption,production,exchange,savings,investment and distribution,work under this price mechanism system,which is labeled as the INVISIBLE HAND BY ADAM SMITH.

Merits of capitalism

Production according to the needs of consumers
Producers produce goods and services that consumers want and this maximizes the needs and satisfaction of consumers.

Economic freedom
Economic freedom means the right to earn and retain property.it also means a freedom of enterprise and choice of occupations.this will lead to the sourcing of the country’s manpower from different sectors.Therefore,there is flexible functioning of different units of productions.

Efficient utilization of resources
Competition creates efficiency in production.Quality goods are produced at lower cost.consumers get the highest quality goods at lower cost since production technique are more efficient.

Variety of consumer goods
Competition takes place with regard to all aspect of the product such as shape,colour,design and packaging.Therefore,consumers will enjoy because of freedom of enterprise,resulting in greather production.

Enchanced trade,business,and research and development(R&D)
Entrepreneurs or producers are always on the lookout for new innovations to compete with other producers.This will lead to a rapid expansions and an increase in employment and income,innovators enjoy the benefits of their research through copyright,patents,etc.

Automatic incentives
Flexibility
There are few demerits capitalism such as 1. Inequality of distributionof wealth and income 2. Inflation and high unemployment rate 3. Lack of social welfare 4. Unnecessary variety and wasteful competition 5. Misallocation of resources.

Features of Capitalism
The following features characterize the capitalist economy otherwise known as market economy or free enterprise: -
1) Private property: it is freedom of individual as consumer or producer to own property or means of production as use them the way he likes but not in such a way to endanger society.
2) Profit motive: The main motive behind capitalist economic system is to maximize profit
3) Price mechanism: prices of all goods and services as well as indivisible hands determine factor inputs.
4) Role of the state: in capitalism economic system government's major role includes the provision the institutional and legal framework to ease working of economy and the provision of public goods and the regulation of monopolies.
5) Consumer's sovereignty: in capitalist economic system consumer is king. He has power to make choice. Thus consumers buy whatever they feel like and work wherever their feel like without any restriction.
6) Freedom of enterprise: Under the system, private individuals are free to engage in any economic activity they wish, provided they have enough capital to do so. There is no restriction as far as enterprise is concerned; individual can be producer, farmer mechanic, plumber etc.
7) Competition: In capitalist economic system there is freedom of exit and entry into business activities and thus enterprises are price taker and as such there is no monopoly situation under the system.

Advantages of Capitalism
1) Increase in production: This leads to the rise of income, saving investment and progress where every farmer, trader and industrialist can hold property and use it in the way he likes. This brings about improvement in production and increased productivity.
2) Quality product at low cost: The twin freedom of consumer and producer leads to the production of quality product and lowering cost and prices.
3) Optimum use of resources: Under capitalism producers undertakes the production of only those goods appear to yield maximum profit in anticipation of demand.
4) Flexible system. In capitalist economy operates automatically through the price mechanism.
5) Efficiency: The presence of competition under capitalism leads to increase efficiency, encourage innovation, research and specialization thereby bringing progress and prosperity in the country.

Disadvantages of Capitalism
1) It leads to monopoly in the Long run: Competition which is one of important feature of capitalism turn out monopoly situation in Long run because less powerful enterprises are forced out of industry and hence monopoly.
2) Income inequality: institution of private property creates inequalities of income and wealth under capitalism.
3) Inefficient production. Capitalism fails to produce goods in accordance with the society's requirement; thus, there is social wastage of economic resources.
4) Poor utilization of resources: The price mechanism under capitalism fails to employ resources of a country fully, hence unemployment and thus freedom of occupation becomes meaningless under capitalism.
5) Human welfare is neglected: This is done through entrepreneurial exploitation of workers and consumes, the system creates problems of employment and economic instability.

Do you think the government should set “ceiling price” and “floor price” for certain goods? (eg. flour, sugar, cooking oil). Explain with reasons A price ceiling is a government-imposed limit on the price charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. However, a price ceiling can cause problems if imposed for a long period without controlled rationing. Price ceilings can produce negative results when the correct solution would have been to increase supply. Misuse occurs when a government misdiagnoses a price as too high when the real problem is that the supply is too low. In an unregulated market economy price ceilings do not exist. Students may incorrectly perceive a price ceiling as being on top of a supply and demand curve.