Problems
of Economics Organization
What to Produce, How to Produce & for Whom to Produce
What and how much will be produced?
In a market system the
forces and interaction of supply and demand for each commodity determines what
and how much to produce. Prices are the reflection of the scarce resource.
How will be produced?
The problem is what
combination or mix of productive resources or inputs should be used in order to
produce a desired product. That is to use more labor and less capital or vice
versa, to more skilled labor and less units of unskilled labor or vice versa.
In a price system, the combination or mix of inputs should be based on
least-combination method. This method maximizes the profit and minimizes the
cost.
In other words, the least-cost
combination is the level of input use that produces a given level of output at
minimum cost. On the other hand, in a price system, competition will force
firms to use the least cost combination method. Competition means there are
large numbers of buyers and sellers in each market that are acting
independently. Therefore, those firms that use the least cost combination
method will be able to lower the price of their products and make a profit.
For whom it will be produced?
The
distribution of goods and services depends on the distribution of money income.
Money income, in turn, depends on the quantity, quality and the types of
resources and the prices of the product. Therefore, the distribution of
finished goods and services will depend on consumers’ ability and willingness
to pay the market price. In fact, relative prices ration the available
resources, goods and services.
Resources
may be allocated by tradition, by markets, or by planning. In a traditional
economy, goods and resources are allocated according to historical patterns.
However, in a market economy, goods and resources are allocated according to
the decisions of individual producers and consumers.
