Economic Understandings - blogs



Economic UnderstandingsScarcity is the limited supply of something. Every country must deal with the problem of scarcity. No country has everything that its people want and need. Therefore, every country must develop an economic system to determine how to use its limited resources to answer the three basic economic questions.What goods will be produced?How will goods be produced?Who will consume the goods and services?The way a society answers these questions determines its economic system. Three types of economic systems exist to answer these questions : traditional, command, and market.Traditional EconomyIn a traditional economy, the customs and habits of the past are used to decide what and how goods will be produced, distributed, and consumed, In this system, each member of the society knows early in life what her or his role in the larger group will be. Because jobs are handed down from generation to generation, there is very little change in the system over generations. In a traditional economy, people are depended upon to fulfill their traditional roles. If some people are not there to do their part, the system can break down. Farming, hunting and gathering, and cattle herding are often a part of a traditional economy. An example of a traditional economy can be found in some native cultures of South America. For example, the Yanomamo Indians in Brazil and Venezuela have such an economy. The men, women, and children have specific jobs that involve raising their food in small gardens or hunting and gathering food from the Amazon rain forest. Each village is able to meet its needs with the resources that it gathers from the forest or from the crops grown in small gardens. The Yanomamo do not have a central government to tell the people what to grow. The government does not tell the Yanomamo what to gather or what to kill for food in the forest. The Yanomamo also do not have a system of buyers and sellers. The food grown in the village is not sold to villagers or to mand EconomyIn a centralized command economy, government planning groups make the basic economic decisions. They determine such things as which goods and services to produce, the prices, and wage rates. Individuals and corporations generally do not own businesses or farm themselves. These are owned by the government. Workers at a business are told what to produce and how much to produce in a given time. This is called a quota. The government’s goal is to assign quotas to all workers. The expectation is that when all workers meet all quotas, everyone in the country will be able to have the goods they need when they need them.There are problems and benefits in this type of economy. One problem with the system is trying to predict exactly what goods people will need. For example, the government may think that building tractors is important. More tractors could mean that farmers can grow more crops. More crops means that more people have the food they need. However, if factories are busy making tractors, they might not be making enough shoes. The people may end up with plenty of food but no shoes to wear.A benefit of this economy is that prices are controlled and people know exactly how much everything will cost. For example, food prices are always kept low, since food is a basic need of all people. The cost of clothing and housing is kept low as well. Health care and education are provided by the government at no cost. The cost of things that are considered luxuries, such as televisions or computers, may be very high since these are not considered basic needs. Wages for different jobs are also set by the government.Cuba is a country that has a centralized command economy. The government owns all factories and most farms. About 90 percent of the people in Cuba work for the government. The Cuban government sets quotas for the farms and factories, and it tries to make sure that everyone’s needs are met by setting the right quotas. Cuba trades goods to other countries for the goods that it cannot provide on its own. For instance, sugar cane is grown in large quantities. The sugar produced is sold to other countries in order to purchase oil and natural gas. Unfortunately, Cuba cannot sell enough sugar to pay for the oil and natural gas it needs. Sometimes the government has to close factories or shut off power in parts of the country to save energy.Market economyIn a decentralized market economy, decisions are guided by changes in prices that occur between individual buyers and sellers in the marketplace. Other names for market systems are free enterprise, capitalism, and laissez-faire. In a market economy, businesses and farms are generally owned by individuals or corporations. Each business or farm decides what it wants to produce. The law of supply and demand determines the price people pay for things. Supply is the amount of goods available. Demand is how many consumers want the goods. Here’s an example. A young lady wants to start a business building and selling computer games. She can charge whatever price she wants for the game: $30, $300, or even $3000. Since kids do not have to buy the games, the game maker has to find a price that is low enough that kids will buy the game, but high enough so that she can pay her workers and herself.Market economies have benefits and problems. A benefit is that consumers can usually find the goods they want. They are free to earn as much money as they want to buy the goods and services they need and want. Businesses are free to find new ways to make better products and lower prices. A problem is that sometimes goods and services go up in price. If there is a great demand for something, the price might go up so much that people cannot afford to purchase it. Another problem is that, if a company does not manage its money well, it can go out of business, and the workers lose their jobs and income.Mexico is an example of a Latin America country with a market economy. Individuals and corporations own most of the businesses and farms in Mexico. They employ people to build a variety of goods sold in Mexico and other countries. Individuals and corporations also sell services to people. These individuals and corporations are free to decide what to sell. The government provides some laws to make sure that businesses run smoothly and fairly. The Mexican government does not set prices for goods and services, and it does not own the businesses and farms.Mixed economyThere are no pure command or market economies. To some degree, all modern economies have characteristics of both systems and are often referred to as mixed economies. However, most economies are closer to one type of economic system than another.In a truly free market economy, for example, the government would not be involved at all. There would be no laws to protect workers from unfair bosses. There would be no rules to make sure that credit cards were properly protected. Many societies have chosen to have some rules to protect consumers, workers, and businesses. There rules reduce the freedoms that businesses have, but they also protect the workers and consumers.Mixed economies come in many forms. Cuba is considered a command economy. However, the Cuban government does allow some farmers to sell extra farm goods after they have met their quotas. These farmers are allowed to keep extra money that they make selling these farm goods.Mexico is considered a market economy. However, the government owns and operates the energy companies. In Brazil, the market economy is used for most businesses and farms. However, the government owns and controls some large industries such as steel production.Cuba’s government controls nearly all businesses. There are a few people who are allowed some freedom to operate their own businesses. Brazil, on the other hand, is mostly a market economy. The government does have rules to govern business, and it owns some industry such as steel production. In the United States, the government makes laws to govern businesses. However, the government does not own businesses and does not control production or prices. ................
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