Basic Economic Problems
Any society, regardless of its size, degree of development and political system, tries to solve their the basic economic problems of deciding how to satisfy the unlimited needs of its market through limited Resources. Below is the list of basic economic problems that must be in your mind as an entrepreneur.
- What to produce
- How to produce
- For Whom to Produce
List of Basic Economic Problems
These basic economic problems are fundamental and interdependent: what to produce? how to produce? And for whom to produce? Every society must decide how to allocate its resources between the different productive activities and how they are going to distribute the goods and services of consumption between the individuals that compose it.
Well, the mechanism by which a society is organized to address these issues is its economic system. Consequently, the economic system of a society is the set of relationships and institutionalized procedures with which it tries to solve the basic economic problem.
What to produce? The answer to the first question indicates in which the productive resources will be used and how much of the final product will be obtained with these means of production. This will depend on the needs of the members of society and the resources available, since the latter are limited and susceptible to alternative uses. This fact raises other questions: Will more consumer or production goods be consumed? Will the quantity or quality in the production be the primary factor? Will the production of material goods or the provision of services increase? Will goods be produced for the internal market or will production be directed towards the outside?
More from Business Study Notes:- What is Economy
How to produce? This question refers to the organization of production, that who is going to be in charge of carrying out the productive activity, how this activity is going to be undertaken and how the productive factors that are available will be combined. All of this implies that society will ask questions such as whether intensive technologies will be used in machinery or labor, whether it will be done through private companies or public initiative, what sources of energy will be used in production or if the productive processes by Those that will be chosen will be polluting or respectful with the environment.
For whom to produce? Every society should design a system of distribution of goods and services, which leads to reflect on issues such as: Who will be the target of that production, a few or the vast majority of citizens? What method or system will be used to distribute the entire production? Will the distribution of income be equal or will there be very sharp differences between members of society?
It is very easy to understand that: WHAT, HOW, and for WHOM to produce would not be problems if the usable resources were unlimited. However, in reality, there are unlimited needs and limited resources available and manufacturing techniques. Based on these restrictions, the Economy must choose between the goods to be produced and the technical processes capable of transforming scarce resources into production.
This factor and the answer to these questions are closely linked to the production management, the economy and of course the Financial Management, because as seen previously, to produce you need to invest and to invest you need planning and resources. Therefore, Financial Management comes to support the economy.
Presenting now a classical division of economics, microeconomics and macroeconomics, it will be verified that, however great the differences between them, Financial Management is present and with a high degree of importance.
Generally, microeconomics is conceived as the branch of Economic Science focused on the study of the behavior of consumer units represented by individuals and / or families (these being characterized by a single budget), the study of companies, their respective productions and costs, And the study of the production and prices of the various goods, services and productive factors.
In this way it is distinguished from macroeconomics, because it is interested in the study of aggregates as the production, consumption and income of the population as a whole.
The bifurcation of Economic Science in these two branches, that is, macroeconomics and microeconomics, date of 1930. decade of beginnings
Both segments revolve around the problem of limited and finite character of productive resources in the face of the vital needs of Civilization, infinite and limitless, underlying the human being, a problem that underlies and justifies the reason for the existence of economics as a science. However, micro and macroeconomics go as initially noted, for different channels and can be identified and / or distinguished according to certain parameters.
The criteria adopted for the distinction are, however, fragile, since the understanding of any economic phenomenon inevitably requires the interrelationship of the theories that are inserted both within the scope of the micro segment and in the macro branch of Economic Science. Among these criteria, the first one is based on the level of abstraction-ism involved. Indeed, as author Robert Y. Awh ponders, microeconomics, in laying down general principles, is far more abstract than macroeconomics, which is concerned with the examination of questions and measures peculiar to a given place and instant of time.
Secondly, microeconomics presents a microscopic view of economic phenomena, and macroeconomics, a telescopic lens, that is, the latter has much larger amplitude, appreciating the functioning of the economy in its global.
It follows a comparative title: considering a forest, microeconomics would study the plant species that comprise it, that is, the composition of the product as a whole, while the macroeconomics would worry about the total product level the forest and its operation.
A third way of distinguishing microeconomics and macroeconomics encompasses the analysis of the behavioral forms of aggregate variables and individual variables. However, the aggregativity here explained must be understood in terms of the homogeneity or not of the set considered.
Thus, if the aggregate could be extracted, at random, an element as representative of the behavior pattern of the others, the area of microeconomics performance would be; otherwise, if there were no possibility of isolating one element of the group in such a way as to reflect the pattern of behavior, the others would enter the field of macroeconomics.
For example, the large aggregates studied by macroeconomics such as income, employment and unemployment, consumption, investment, and savings are all heterogeneous in nature. Microeconomics is devoted to the appreciation of the individual units of the economy.
Thus, the study of Consumer Theory considers the behavior of the individual (or family, as long as the unit of consumption and / or expenditure is unique) and will subsidize the Demand Analysis; Also, in the Theory of Firm, which unfolds in Theories of Production, Costs and Income and based on the Analysis of the Offer, again we have the analysis of the forms of behavior of individual units, in this case, the companies. But both Consumer Theory and Firm Theory allow instrumental and / or notions to be inferred, such as those underlying Individual and Aggregate Searches and Individual and Aggregate Bids. It should be noted, however, that both Aggregate Demand and Aggregate Supply allow us to obtain a standard element of the set, given the homogeneous character of which they are endowed.
The last and no less important criterion of distinction between microeconomics and macroeconomics rests on the price aspect. The last segment, at most, addresses the absolute levels of prices, while relative prices are concerns, par excellence, of the first segment.
Effectively, microeconomics is also known as Price Theory, since it seeks to evidence the formation of prices of goods and services, as well as of productive resources. How is this accomplished?
In the Consumer Theory, microeconomics extols the intention of individuals, in view of their respective incomes, to appropriate a combination of quantities of goods in order to maximize their satisfaction. In other words, the searches (individual and aggregate) that will result in income for the firms originate there.
In the Firm Theory, one has the figure of the individual-entrepreneur striving to combine the factors of production, due to its budget constraint, with the intention of maximizing the level of profit of his organization. Put another way, we obtain from the analysis of this procedure, the elements necessary to derive individual and market offers.
The combination of the quantities of factors of production, goods and / or services that consumers would be willing to buy (which are usually infinite and unlimited), and the quantities of these elements that entrepreneurs would be able to sell (which always translate into a supply Finite and limited, in the face of the scarcity of productive resources), imposes the determination of a common denominator, which will be nothing more than the price.
The determination of this price, the level of which will depend a great deal on the economic framework or the market structure involved, is the task that microeconomics proposes when studying the question, both in terms of factors of production and in the case of goods and / Or services. It is clear that the theme of economics is vast and can cover much more topics and in more depth, but since the course is Financial Management, the main concern is to insert in the course of the course the economy, with its basic concept and the elementary division between micro And macroeconomics.
Clarifying now some concepts about market will be approached the generic concept of market and a greater detail on the market that interests more in this course, the financial market.
There are classic market definitions, such as Adam Smith’s, but in a more simplistic way the market is defined as a set of voluntary contact points between sellers and potential buyers of a good or service that, under contractual conditions of purchase and Sale, they do business.
Implicit aspects in the market concept
1- The context include any type of exchange: direct exchange (direct negotiations between sellers anywhere) and indirect exchange (trading through commodity exchanges, intermediaries, such as brokers or similar institutions). Thus, the definition of the market is characterized by the idea of economic space, that is, it is not confined to a specific region that is to say that there is no physical or geographical limitation.
2- Negotiations are voluntary and the price system functions as a common denominator in trade.
3- There is no need for the explicit presence of the parties involved in the process. This possibility is possible through the development of international real-time telecommunication networks and product standardization (commodities). Markets thus develop in local, regional, national and international terms.
It is worth noting that there are different stages in the transaction process, but the most common and known is the wholesale and retail.