Main economic problem and solutions

Main economic problem and solutions

            By definition, economics refers to the study of how people satisfy their wants or needs with scarce resources. The essence in the description is that there are so many needs to be fulfilled, and too little resources to satisfy such needs. The core purpose of economic activity is to fulfill a need. Scarcity, therefore, becomes the reason why needs may end up unsatisfied. Economics has to do with decisions around the production and consumption of goods and services. Production is enabled by factors of production, which are the resources. Scarcity means that such factors are limited.

As a result of scarcity, we are required to make choices and prioritization regarding our needs. Such decisions call for trade-offs. Trade-offs, in this context, means that we are required to forego some things wholly or partly to acquire others (Nicholson & Snyder, 2012). The decision here is determined by factors such as price and level of need. For instance, meet is costly compared to vegetables. A rational consumer chooses to eat ugali with vegetables rather than with meat. This is because such a consumer will save some money to buy more vegetables tomorrow. Every purchase is a trade-off, and all trade-offs come with opportunity costs. Opportunity cost is the cost of the commodity you forego to obtain another. In respect to factors of production, when a manager buys a machine that reduces labor by three hours, the amount that would be paid in labor for the three hours is the opportunity cost.

The trade-offs between scarcity and choice are solved by demand and supply. Generally, the economy is said to be governed by forces of demand and supply. By manipulating demand and supply, we can be able to balance between our needs and choices. Income is a limited resource, and if commodities are priced too high, then we shall not be able to afford them. The concept of elasticity comes in here. Price elasticity of demand is the impact on quantity demanded that a change in price causes (Nicholson & Snyder, 2012). A decrease in price will lead to increased demand. This is because a small amount of money can buy a lot of goods. Similarly, supply rises with an increase in price. This explains why the government intervenes to control prices. The government regulates prices for all products to make sure that they allow for enough supply, and that the market demand is catered for. This makes sure that producers bring enough products to the market, and sell them a price that is affordable to everyone.

Qtn. 2 No transaction takes place unless both parties benefit.

Economic entities are said to be interdependent. This is because consumers depend on producers and firms for goods and services. Similarly, producers and firms depend on consumers for market and labor (Becker, 2017). I still agree with the statement that if people were independent parties, no transaction would take place unless both parties benefit. This is more so in today’s free market. In a free market, prices are fixed by forces of demand and supply. There is also the assumption that the consumer is a rational being who knows what they want and can prioritize and make the right choice at the right time.

The free market provides a conducive environment in which every player benefits. This can be explained in the way the market sets prices in a way that consumers can afford, and firms can make profits. According to the principle of the free market, any firm that sets a price higher than the market price will end up losing customers. Similarly, a firm that sets a price lower than the market price ends up with no profits. The free market is, therefore, said to be self-regulatory, and it accommodates everyone. Such an environment brings about an automatic mutual benefit between the seller and the buyer.

If people were independent parties, no transaction would take place if both parties do not benefit. This is because firms engage in business for profit-making, and buyers seek the satisfaction of their needs. A buyer would want to sell the commodity at a price that gives him or her a good profit. Buyers, on the other hand, tend to minimize their expenditure but obtain optimum satisfaction (Becker, 2017). Therefore, the seller must make sure that his target profit is accounted for in the price. The buyer also must make sure that the quality of the commodity is satisfactory and affordable. Until both parties hit a deal that caters to their interests, then no transaction will occur. It, however, worth noting that there exist monopolies that might charge the price they want. But the resultant effect of this is that they will have minimal customer turnover with time because probably the commodity is not a basic need. Eventually, the firm will have low profits cumulatively, and it will have to reconsider the price to a point where both the firm and the customer are befitting. Therefore, no transaction would take place unless both parties benefit.

References

Becker, G. S. (2017). Economic theory. Routledge.