The main reason for studying economics is that it is practical. Everyone makes economic decisions everyday. We all face the problem of scarcity and, thus, must continue to make choices. Today, people are getting to be more and more concerned about Economics. The current economic situation seems to interests everybody in society; the bread earner, the laborer, the bank teller, the accountant, the college professor, and even the student.
While most of these people have had no actual background in economics, it comes as a change for the students to familiarize himself with what economics is about. He gets to learn how
to analyze the theory and to explain why things are happening in the nation. With today’s emphasis on economics it, therefore, pays to be equipped with the knowledge of economic theory. Man’s basic economic activity consists of effort to satisfy human wants with the use of goods and services. It involved satisfaction. Human wants from the needs for survival otherwise known as basic needs (e. g. food, clothing & shelter), to higher needs for a comfortable and more meaningful life. Man is subject to create wants, developed due to the effects of advertising and demonstrative effects of consumption. Economics is
concerned with the satisfaction of many of these human wants especially the basic ones. The basic economic resources of a nation consists of land, labor, capital and entrepreneurship. The economy should pay the owners of these basic factors of production for the use of their resources such as rent for the land, wage or salary for labor, interests for capital and profit for entrepreneurship. The technique of production which shows how resources are used and combined in production, thus, production is described as capital intensive or labor intensive depending on what factor is predominantly used.
In effect, the basis activities of man also constitute the basic exchange that take place between the business firm and the consumers. The household is the basic consuming unit in the economy. Since human wants are unlimited, it maxims its satisfaction through the proper allocation or mix of expenditures within the context of budget limitations. The business firm serves as the economy’s producing unit to satisfy human wants with goods and services. The use of the resources generates income for the resource owners. Most societies aim to use economic-activity as a channel to improve the people’s
standards of living within the limits of available resources. Hence, a government can restructure the economic system in order to solve its shortcomings or problems like; unemployment, economic instability that cause highs and lows in production and investment levels, low level of growth and development, inequality income distribution, determination of the type of economic system. The choice of the nation’s economic system is vital to any country because it determines the manner in which goods will be produced, the quantities of each good that will be produced and the distribution of these goods and services.
Within the economy, the basic activities of production, consumption, employment and income generation take place through the interrelationship existing between the basic consuming unit, which is the household and the basic producing unit, which is the firm. Business firm supplying the household with goods and services in exchange for payments representing consumption expenditures. On the other hand, the business firm has to use economic resources consisting of land, labor, capital and entrepreneur to produce these goods and services. The households provide the firms’ theses resources in
exchange for payments in the forms of rent, interest, wages, salaries and profit. The money flow is depicted in the money payment by the firm to the household of its money income and by household to the firm for its purchase of goods and services. On the other hand, the good flow is depicted in the flow of economic resources from the household to the firm and in the flow of good and services from the firm to the household. An economic system, in answering the needs of society, has the function of determining what goods and services to produce as well as the order of their importance. This will
naturally depend on the needs of the economy as well as its goals and objectives. In addition, the economic system has to perform the task of organizing productive efforts to produce the selected goods and services in the proper quantities. Lastly it must determine how these goods and services should be shared among the members of society(Leftwich). In traditional economic system, production decisions are made according to customs and traditions ( not allowing the producers to adjust to changes dictated by the time). This is usually practices in underdeveloped regions and in mountainous areas where
The command economics, the answers to the basic economic problems are dictated by the government through the head of the nation or a group of men designated by the head to make the decisions. This system is socialistic as the government owns and controls the factors of production. The government plans what to produce and how resources should be allocated. The system works under the principle that the interest of society should prevail over that of the individuals. Decision regarding the distribution of goods, lie in the hands of the government and, hence individual preferences are not considered at all.
The market system deals with the economic problems by considering consumers choices. Consumers demand in the market as reflected in the prices of goods and services. The market prices serve as signals to the producers about what goods to produce and how much of these goods should be produced. The problem of production is therefore, solved by the price mechanism. In an economy where prices are continuously rising, people have always wondered what factors cause prices to fluctuate. The demand and supply are the main forces that cause prices to increase or decrease.
From our daily experience of buying and selling, we know that higher prices influence people to buy less. Therefore, the demand function shows how the quantity demanded on a particular good responds to price change. As price increases, the quantity demanded of the product decreases, but as price decreases, the quantity purchased will instead increase. (If the price is low demand is high while if the price is high demand is low) Individual consumers, business firms and government agencies participate in the market place motivated by the desire to maximize utility (consumers), profits (business firms), or
the general welfare (Government agencies). People who are willing and able to buy a particular goods at some price become part of the market demand while those willing and able to sell the good demanded by people at some price are part of the market supply. The behavior of all buyers and sellers in a market determines the quality of good and services that is actually exchanged. With today’s emphasis on economics it therefore, pays to be equipped with the knowledge of economic system and learn the basic economics. Leftwich, Richard. 1969. An introduction to economic thinking. USA: Rhinehart & Winston Inc.