THE ECONOMIC PROBLEM AND ECONOMIC SYSTEMS
The economic activity of a society consists of activities related to the production and consumption of goods and services. Since earliest times, the primary function of organized society has been economic in nature. The other elements of civilized society -- architecture, literature, music, etc. -- emerge only after the material needs of the society have been amply provided for. Poor societies do not build great pyramids, erect magnificent cathedrals, or place men on the moon. Everyday, all of us are involved in activities that are primarily economic in nature. To fully understand these activities, we need to create a new perspective of the world -- an economic perspective. Let's begin this task with some definitions. Production is the creation of goods and services by combining various elements in the production process. For example, the farmer grows a wheat crop by combining his labor with the land, seed, fertilizer, and machinery. Consumption is the destruction of goods and services to satisfy the wants and needs of people. A person who is hungry eats a meal, and the food ceases to exist as food. Goods are tangible outputs of the production process -- the good has a physical existence. Production and consumption can be separated by time and place. The farmer grows the wheat in Iowa in May. The girl eats the bread in Georgia in September. Goods include consumer durables, consumer nondurables, and capital (producer durables). Services are intangible outputs of the production process -- services have no physical existence. As a result, production and consumption usually occur at the same time and place. The professor gives a lecture to students in the classroom. Services include education, repair, finance, government, energy, and telecommunications. The Economic Problem
The economic problem emerges because our desire for goods and services to consume is greater than our ability to produce those goods and services. The demand for goods and services arises from human wants. There are three types of human wants. Biological wants are for the goods and services needed to sustain human life. These are food, shelter, and clothing. These goods are often called "necessities". Cultural wants for are for goods and services beyond necessities in order to maintain the socially accepted standard of living. The idea of a standard of living will vary with time and place. An acceptable living standard for 1800 would not be acceptable in 2000. These goods and services are called "conveniences". Demonstration wants are for goods and services beyond conveniences. Thanks to modern telecommunications, we all know about the lifestyles of the rich and famous, and would not mind it for ourselves. These goods and services are called "luxuries". Note that economic development means that the luxuries of yesterday become the conveniences of today! Economists assume that human wants possess a critical characteristic that I will state as a proposition. Proposition A: Human wants for goods and services to consume are, in the aggregate, insatiable. We have never seen any human society enjoying want saturation, including the United States today. Sadly, the developing nations of the world often cannot even provide for life sustaining biological wants. The supply of goods and services results from the production process. In production, various inputs are brought together and combined to create goods and services. These inputs are classified into the three "factors of production". Land is natural resources or our endowment from nature. The payments for the use of land are called "rents" and "royalties". Labor is all human effort, both physical and mental, used in production. The payments for labor are "wages" and "salaries". Capital is all goods used to produce other goods and services. Capital is also called "producer durables". Capital has to be produced, and to get more capital we must reduce our production of...
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