to determine
efficient
to allocate factors of production
to provide answer
available resources
to rely upon government
remote areas
isolated tribes
rural area
generation
the selection of crops
to sustain
harvest is poor ()
to survive
tribal chief
landowner
custom
remains
The central problem of economics is to determine the most efficient ways to allocate the factors of production (natural resources, human resources and capital) and solve the problem of scarcity created by societys unlimited wants and limited resources. In doing so, every society must provide answers to the same three questions:
- What goods and services are to be produced and in what quantities are they to be produced?
- How are those goods and services to be produced?
- Who will receive and consume them?
Societies and nations have created different economic systems to provide answers to these
fundamental questions.
An economic system is the way in which a country uses its available resources (land, workers, natural resources, machinery, etc.) to satisfy the demands of its population for goods and services. The more goods and services that can be produced from these limited resources the higher the standard of livingof the population.
If we look at the different political and social structures which exist in the world today, and the way in which these systems have developed over the years, we can say that people use a very great varieties of economic systems. In fact, it is possible to group these different economic structures into four broad categories:
- traditional economy which looks to customs and traditions
- planned or command economy which rely upon governments to provide the answers
- market economy in which market prices answer most of What, How and Who questions.
- mixed economy, which is a mixture of command and market economies.
The traditional economy. The answers to the What, How and Who questions are decided by traditions in these economies. Traditional economy systems are usually found in the more remote areas of the world. Such systems may characterize isolated tribes or groups or even whole economies. Typically, in a traditional economy most of the people live in rural areas and their main activities are agriculture, fishing or hunting. The goods and services in such a system are those that have been produced for many years or even generations in a way they have always been produced. In short, the division of land among the families in the village or tribe, the methods and times of planting and harvesting, the selection of crops, and the way in which the product is distributed among the different groups are all determined by very slowly changing traditions.
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The basic economic problems do not arise as problems to be discussed and agued about. They have all been decided long ago. Who gets what is produced in such an economy? Since there is little produced, there is little to be distributed. Most individuals live very poor, they have enough to sustain them but not more than that. In some years, when the harvest is poor, some are not able to survive and either leave the society or die. In better years, when the harvest is high there may be more than enough to survive. When such a surplus exists, it is distributed traditionally. The most part of the product may go to a tribal chief or large landowner, while the remains are distributed according to customs.
