The 3 basic questions of what and how to produce, and who to produce for are determined by

one.3 What Is Economic science?

Learning Objectives

1. Ascertain economics and identify factors of production.
2. Explain how economists answer the three key economics questions.
3. Compare and contrast economical systems.

To appreciate how a business organisation functions, we need to know something about the economical surroundings in which it operates. We begin with a definition of economics and a discussion of the resources used to produce goods and services.

Resources: Inputs and Outputs

Economics is the study of the product, distribution, and consumption of goods and services. Resources are the inputs used to produce outputs. Resources may include any or all of the following:

• Land and other natural resources
• Labor (physical and mental)
• Capital letter, including buildings and equipment
• Entrepreneurship

Resource are combined to produce goods and services. Country and natural resources provide the needed raw materials. Labor transforms raw materials into goods and services. Upper-case letter (equipment, buildings, vehicles, greenbacks, and and then forth) are needed for the production process. Entrepreneurship provides the skill and creativity needed to bring the other resource together to produce a proficient or service to be sold to the marketplace.

Because a business uses resources to produce things, nosotros as well call these resource factors of production. The factors of production used to produce a shirt would include the following:

• The state that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which the shirts are made
• The laborers who make the shirts
• The factory and equipment used in the manufacturing process, as well every bit the coin needed to operate the factory
• The entrepreneurship skill used to coordinate the other resources to initiate the production process and the distribution of the goods or services to the market

Input and Output Markets

Many of the factors of production (or resource) are provided to businesses by households. For instance, households provide businesses with labor (every bit workers), land and buildings (as landlords), and uppercase (equally investors). In turn, businesses pay households for these resources by providing them with income, such every bit wages, hire, and interest. The resources obtained from households are and so used by businesses to produce goods and services, which are sold to the same households that provide businesses with revenue. The acquirement obtained by businesses is then used to purchase additional resources, and the bicycle continues. This round period is described in Figure 1.3 "The Circular Flow of Inputs and Outputs", which illustrates the dual roles of households and businesses:

• Households non only provide factors of production (or resource) but also consume goods and services.
• Businesses not only purchase resource but as well produce and sell both appurtenances and services.

Figure 1.3 The Circular Flow of Inputs and Outputs

The Questions Economists Ask

Economists report the interactions between households and businesses and expect at the ways in which the factors of product are combined to produce the goods and services that people demand. Basically, economists try to answer three sets of questions:

1. What goods and services should exist produced to meet consumers' needs? In what quantity? When should they be produced?
2. How should appurtenances and services be produced? Who should produce them, and what resources, including technology, should be combined to produce them?
3. Who should receive the goods and services produced? How should they be allocated among consumers?

Economical Systems

The answers to these questions depend on a land'southward economical system—the ways past which a order (households, businesses, and government) makes decisions about allocating resources to produce products and about distributing those products. The degree to which individuals and concern owners, as opposed to the government, enjoy freedom in making these decisions varies according to the type of economic system. By and large speaking, economic systems can be divided into two systems: planned systems and free market place systems.

Planned Systems

In a planned arrangement, the government exerts command over the allocation and distribution of all or some goods and services. The system with the highest level of government control is communism. In theory, a communist economic system is ane in which the government owns all or almost enterprises. Central planning past the government dictates which appurtenances or services are produced, how they are produced, and who will receive them. In exercise, pure communism is practically nonexistent today, and only a few countries (notably Democratic people's republic of korea and Republic of cuba) operate under rigid, centrally planned economical systems.

Under socialism, industries that provide essential services, such as utilities, cyberbanking, and health care, may be government owned. Other businesses are owned privately. Primal planning allocates the goods and services produced by regime-run industries and tries to ensure that the resulting wealth is distributed equally. In dissimilarity, privately owned companies are operated for the purpose of making a profit for their owners. In full general, workers in socialist economies work fewer hours, have longer vacations, and receive more health intendance, teaching, and child-care benefits than do workers in backer economies. To offset the high toll of public services, taxes are mostly steep. Examples of socialist countries include Sweden and French republic.

Costless Market Organisation

The economic organization in which most businesses are endemic and operated by individuals is the free marketplace arrangement, also known as commercialism. Equally nosotros will come across next, in a free market, competition dictates how goods and services will be allocated. Concern is conducted with but limited government interest. The economies of the The states and other countries, such as Nihon, are based on capitalism.

How Economic Systems Compare

In comparing economic systems, it's helpful to think of a continuum with communism at one end and pure capitalism at the other, as in Effigy ane.iv "The Spectrum of Economic Systems". As you move from left to right, the amount of government command over business diminishes. So, too, does the level of social services, such as health care, child-care services, social security, and unemployment benefits.

Figure ane.4 The Spectrum of Economic Systems

Mixed Market Economic system

Though it's possible to have a pure communist system, or a pure capitalist (gratis market) system, in reality many economic systems are mixed. A mixed market place economy relies on both markets and the government to allocate resources. We've already seen that this is what happens in socialist economies in which the government controls selected major industries, such as transportation and health care, while allowing individual ownership of other industries. Even previously communist economies, such as those of Eastern Europe and China, are becoming more than mixed as they adopt capitalistic characteristics and catechumen businesses previously owned by the government to private ownership through a process called privatization.

The U.S. Economical Arrangement

Similar about countries, the United states of america features a mixed market system: though the U.Southward. economic system is primarily a complimentary market system, the federal government controls some basic services, such as the postal service and air traffic command. The U.S. economy besides has some characteristics of a socialist system, such equally providing social security retirement benefits to retired workers.

The costless market place arrangement was consort by Adam Smith in his volume The Wealth of Nations, published in 1776¹. According to Smith, contest lonely would ensure that consumers received the best products at the all-time prices. In the kind of contest he assumed, a seller who tries to charge more for his product than other sellers won't be able to find whatsoever buyers. A job-seeker who asks more than than the going wage won't be hired. Because the "invisible paw" of competition will brand the market work effectively, there won't be a need to regulate prices or wages.

Nearly immediately, however, a tension adult among costless market theorists between the principle of laissez-faire—leaving things alone—and authorities intervention. Today, it's common for the U.S. government to intervene in the functioning of the economical arrangement. For example, government exerts influence on the food and pharmaceutical industries through the Food and Drug Administration, which protects consumers past preventing dangerous or mislabeled products from reaching the market.

To appreciate how businesses operate, we must commencement get an idea of how prices are set in competitive markets. Thus, Department one.four "Perfect Competition and Supply and Need" begins by describing how markets establish prices in an environs of perfect competition.

Central Takeaways

• Economics is the study of the production, distribution, and consumption of goods and services.
• Economists address these three questions: (1) What goods and services should be produced to run across consumer needs? (2) How should they be produced, and who should produce them? (three) Who should receive appurtenances and services?
• The answers to these questions depend on a state's economical organization. The master economic systems that exist today are planned and complimentary market systems.
• In a planned system, such as communism and socialism, the government exerts control over the production and distribution of all or some goods and services.
• In a free marketplace system, as well known as commercialism, business is conducted with only limited regime involvement. Competition determines what goods and services are produced, how they are produced, and for whom.

Exercises

1. If you started a business that made surfboards, what factors of production would you need to brand your product? Where would you get them? Where would y'all find the money you lot'd need to pay for additional resources?
2. Which three key questions exercise economists try to answer? Volition answers to these questions differ, depending on whether they're working in the U.s.a. or in Cuba? Explain your reply.

¹According to many scholars, The Wealth of Nations not only is the nigh influential volume on gratis-market capitalism but remains relevant today.

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Source: https://open.lib.umn.edu/exploringbusiness/chapter/1-3-what-is-economics-2/

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