SCARCITY AND CHOICE IN MODERN SOCIETY The bus driver works for wages, but needs his food, so the wages are exchanged in order to satisfy his needs. As such, exchange must take place if everyone’s wants are to be satisfied. The process of exchange involves making choices. The bus driver had to chose between keeping his wages, going to the movies or buying food. Whenever we go shopping, we are involved in the basic economic activity of making choices because we have scarce resources. We may have to choose between buying a book bag we need and a sneakers we want. We have unlimited wants but we have limited resources (money) available. We also have to form a Scale of Preference. We have to put what we want into some order of priority. To get one valuable item means that another item of value has to be given up. Opportunity Cost, becomes significant, since we will have to forego one item for another. Scarcity and choice are not only problems that have to be faced by individuals. Firms and Governments have to make choices also. When a country has to decide to build a school instead of a hospital, because the school is priority then there is a cost attached. If a firm has reaped huge profits, they will need to decide, should we expand our Business by trying a new product or should we reward our staff with a higher wage. This is what Economic is about. Economic is defined as the study of scarcity and choice. In other words, how will society share its limited resources among all the various entities in the society that are competing for these scarce resources? This problem is the Economic Problem. It is against this problem that the various economic systems are designed to deal with this problem. An Economic System, refers to the way in which a country plans to utilize its resources to the best benefit of their society. Three main approaches, adopted by governments are: Free market economy Controlled economy Mixed economy Societies are organized to answer three basic economic questions. These are as followed: 1. What goods and services to produce? 2. How will the goods and services be produced? 3. For whom are the goods services to be produced? FREE MARKET ECONOMY Characteristics of a Free Market Economy There is little or no government interference. The customer drives the economy. They influence the producers who will not make a profit by producing goods that are not in demand. The entrepreneur sets up his own business and dictates production and profit targets. The consumer buys freely to satisfy the needs and wants of his family. This system may also be known as Laissez-faire, capitalist, or unplanned. Example of such system are UK, Hong Kong and USA. Advantages of Free Market Economy Government’s involvement is very limited. Competition among firms forces prices down. Producers are free to use the factors of production in anyway they consider to be most suitable to them. Consumers are free to spend their money in any way they choose. A large variety of goods and services are produced to satisfy the needs of the consumer. Disadvantage of Free Market Economy The profit motive drives this economy and thus encourages unequal distribution of wealth. The rich get richer and the poor get poorer. Monopolies develop and these can exploit consumers since they can decide on higher prices. Social and merit goods, example, health, education and security may not be provided. PLANNED ECONOMY The state owns and controls the means of production and the profits gained from these industries are used for the benefit of the people in the country. Advantages of Planned Economy Since the government decides what is to be produced they will use resources wisely for the citizens benefit. Profits resulting from industry and agriculture may be used to foster further production, provide public goods like hospitals and schools and better welfare services. Incomes are more evenly distributed. Workers may work harder, since they may feel that they are working for themselves and their country. Disadvantages of Planned Economy There is the difficulty of estimating the quantities of products that are needed for the country as a whole, because not all the information may be available to make right decisions. A great deal of personnel is required for central planning and this may result in wastage of manpower. There may be a conflict of interest because what the country needs may not be what the country wants. This system may also be called Controlled or Command Example China, Cuba. MIXED ECONOMY Characteristics The Mixed Economy has features of both free and planned economic systems. Most Caribbean countries practice this system. Therefore the nations’ industries are in the hands of the private sector or the state. Most governments controls water, electricity and transport. Advantages The government is allowed to intervene in areas of the economy to collect taxes and pass laws to protect citizens from unfair trading practices. Social cost like pollution are kept at a minimum. Both the private and public sector may unite in producing goods. For example, the government may allow private firms to do road repairs. Government protects the consumers and producers by selling minimum prices. Disadvantages Conflict may arise between government and private firms and this may result in long delays in the production of goods and services. Government may regulate the economy so tightly that this dampens the free enterprise sprit. Past paper questions 2005 question 5 a. State THREE functions of a business.  b. Identify THREE differences between a market economy and a planned economy.  c. Name a country which has: i. A planned economy ii. A mixed economy  d. List THREE methods of internal communication used in an organization.  e. i. Evaluate the effectiveness of ONE method listed in d. above.  ii. Outline TWO reasons why an effective communication flow is important to an organization.  2004 question 1 a.State THREE differences between a centrally planned economic system and a market driven economic system.  b.Identify THREE differences between the private sector and the public sector.  c.State TWO legal requirements which a public limited company must satisfy before operating as a business.  2002 question 1 a.List TWO types of economic systems.  b.Explain the differences between the types of economic systems listed in a. above.  c.Suggest TWO ways by which the government of your country can control business activity.  1999 question 1 a.List TWO types of economic systems.  b.Explain the differences between the types of economic systems listed in a. above.  c.Suggest TWO ways in which your government may assist the two economic systems in a. above to enable them to be more productive.