What is Economics?

Satisfactory Essays
Economics, in one aspect, is the study of how individuals, societies, and countries manage to deal with the problem of scarcity. Scarcity is a problem within economics because the wants of people are unlimited and the resources available to fulfil those wants are finite (Sloman, 2001). The answer to scarcity is efficiency which Gowland and Paterson (1993) described as the most benefit from a certain amount of scarce resources. Within the economic system, there are several types of economies, each generating a different level of efficiency. It is said that an economic system that has allocative efficiency, productive efficiency, and equity will be effective. Along with the latter mentioned, the division of labour and comparative advantage, when exploited also bring about the effectiveness of a system. Within an economic system there are two contrasting ideals: the market economy and the planned economy. A free-market or laissez-faire economy makes decisions on an individual level with minimal government intervention. On the other hand of the spectrum lies the planned economy where all economic decisions are made by the government (Sloman, 2001). Both economies have their advantages and disadvantages. In a free-market economy there is freedom of choice, high incentives, and the belief in consumer sovereignty, yet, there are problems such as inequality of income, macroeconomic instability, and the chance of market failure. Likewise, though a planned economy has advantages such as low levels of unemployment and equal distribution of income, there is a loss of personal freedom and lack of consumer choice. Many people feel that efficiency lies in the free-market economy where one can easily answer the questions what should be produced, how it should be produced, and for whom. However, the problem with this ‘capitalist’ economy is that poverty and boom and bust cycles reduce progress (Economic Systems: How Societies adapt to Problems, 2003). “If you care about economic efficiency, you should like free markets…But they would also believe the second one should be qualified, in addition to its stabilisation and distribution functions, governments will be needed to correct market imperfections…” (Rhoads, 1999, p.66) Rhoads (1999) mentions how a market economy leans towards more efficiency but needs the government sporadically, a combination which makes the so-called mixed economy. A mixed economy which leans towards laissez-faire, as in the case with the U.S or the United Kingdom, is rather successful. On the contrary, countries, such as Burma or North Korea, which slant towards a planned economy, lack progress. Along with allocative efficiency, how resources should be allocated, productive efficiency, which production method should be utilised, and equity, “specialisation and exchange are both necessary to have an efficient economy” (Demmert, 1991 p.3). Specialisation comes in the