1.1. THE ECONOMIC PROBLEM
This video is relevant for this section despite it saying that it is for AQA.
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THE PURPOSE OF ECONOMIC ACTIVITY
The central purpose of economic activity is to improve the economic welfare of society. Economic welfare is viewed as the accumulative happiness of individuals in society. Individuals consume goods and services and these goods and services give them utility. Utility is essentially happiness of an individual. Economists assume that if individuals consume more goods then they will become happier. Therefore, the production of more goods and services will increase economic welfare. However, economic agents have unlimited wants but resources in an economy are scarce. The environment is a prime example of a scarce resource as it is finite, meaning that we can only extract so much before all of the environment’s resources are exhausted. These unlimited wants combined with the scarce resources result in an economic problem. This economic problem is:
The central purpose of economic activity is to improve the economic welfare of society. Economic welfare is viewed as the accumulative happiness of individuals in society. Individuals consume goods and services and these goods and services give them utility. Utility is essentially happiness of an individual. Economists assume that if individuals consume more goods then they will become happier. Therefore, the production of more goods and services will increase economic welfare. However, economic agents have unlimited wants but resources in an economy are scarce. The environment is a prime example of a scarce resource as it is finite, meaning that we can only extract so much before all of the environment’s resources are exhausted. These unlimited wants combined with the scarce resources result in an economic problem. This economic problem is:
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These 3 basic economic problems apply to all societies no matter what level of development they have reached. Different societies can adopt very different ways of solving these 3 problems. For example, some countries believe that the free market is the best way. They believe that the free market will enhance the economic welfare of their citizens; this is known as a Market Economy.
On the other hand, we can have a Command Economy, whereby the government chooses what happens to the resources in the economy. They decide what is produced, how it is produced and who receives what.
There is also a third type, whereby we have something in the middle, where the Government has some influence in the economy but free market plays a role as well.
Both Command and Market Economies are both theoretical because some goods the Government will need to provide, such as, public goods like defence and street lighting, and other goods they will want to provide such as education (a merit good). But economies can lean towards one. For example, America has a very large private section and is close to a Market Economy. In contrast, North Korea, China and Cuba are close to a Command Economy.
In the UK we have a mixed economy but our level of the mix has changed over time. Before Margaret Thatcher came in to power in 1979, the government owned a large amount of firms and had a large influence in the economy. Then MargaretThatcher came into power in 1979 and she believed that market force was the best way to solve the economic problem. She believed that markets should be freer rather than being held back by Government regulation. She freed up the regulation on the banking system and deregulated other industries. She also believed that the Government should have a small role in the economy and should not own its own firms leading to privatization. Thatcher sold off the telecoms, railways, utilities and many more. Thatcher’s polices have meant that our mix in the economy has moved towards a market economy (only a slight movement). Since the 1980’s the mix has not changed but maybe with a Conservative Government in power now, our economy will move and become more of a market led one. We have already seen the privatization of Royal Mail and the tax holders stake in various banks being sold off.
On the other hand, we can have a Command Economy, whereby the government chooses what happens to the resources in the economy. They decide what is produced, how it is produced and who receives what.
There is also a third type, whereby we have something in the middle, where the Government has some influence in the economy but free market plays a role as well.
Both Command and Market Economies are both theoretical because some goods the Government will need to provide, such as, public goods like defence and street lighting, and other goods they will want to provide such as education (a merit good). But economies can lean towards one. For example, America has a very large private section and is close to a Market Economy. In contrast, North Korea, China and Cuba are close to a Command Economy.
In the UK we have a mixed economy but our level of the mix has changed over time. Before Margaret Thatcher came in to power in 1979, the government owned a large amount of firms and had a large influence in the economy. Then MargaretThatcher came into power in 1979 and she believed that market force was the best way to solve the economic problem. She believed that markets should be freer rather than being held back by Government regulation. She freed up the regulation on the banking system and deregulated other industries. She also believed that the Government should have a small role in the economy and should not own its own firms leading to privatization. Thatcher sold off the telecoms, railways, utilities and many more. Thatcher’s polices have meant that our mix in the economy has moved towards a market economy (only a slight movement). Since the 1980’s the mix has not changed but maybe with a Conservative Government in power now, our economy will move and become more of a market led one. We have already seen the privatization of Royal Mail and the tax holders stake in various banks being sold off.