THE ECONOMIC ACTIVITY AND PROBLEM

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, - 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.

The economic problem fundamentally revolves around the idea of choice, which ultimately must answer the problem. Due to the limited resources available, businesses must determine what to produce first to satisfy demand. Consumers are considered the biggest influences of this choice, and the goods which they want must also fit within their budgets and purchasing power parity. Different economic models place choice in different hands. Socialism asserts that producers (workers) should have some control over the decisions that effect their welfare in the workplace and on the governmental level, which cooperatively formulates economic plans for economic decisions regarding the allocation and use of capital goods. Socialist systems that utilize the market for this role are termed market socialism. The idea of State socialism argues that most or all major economic choices (regarding production, allocation of inputs and distribution of output) should be made through central planning by the government. Only by constructing a cohesive plan that takes the good of everyone into account, so the idea states, can the best allocation of resources be achieved. Communism refers to a stage of development where the productive forces are advanced to such a degree that it solves the economic problem, insofar as needs are concerned. A communist system is a highly developed form of socialism where productive property is held in common, individual autonomy from coercive social relations is abolished and the state no longer exists. Capitalism argues for a system where private businesses (and some state-owned enterprises, in the case of mixed economies) make economic decisions regarding investment decisions, production levels and distribution of output, wherein the role of the government is to protect the property rights of individuals and companies, provide the institutional and infrastructural framework for the development of a market economy and the provision of some government social programs. In a free-market economy, which exists without the constraints of government wage and price controls, proponents of market capitalism argue that resources are automatically allocated toward the things that society collectively values the most.

Economic Efficiency and Functions

Technical Efficiency means getting maximum production from the available land, labor, and capital resources. This is often called "full employment" or the "natural level of output". There should be no resources lying idle, especially in the long run. Getting maximum output is also equivalent to producing at the lowest possible cost.

Allocative Efficiency means producing goods and services in the best relative amounts to maximize the economic wellbeing of the society. What constitutes "best" is a source of intense debate, and even leads to armed conflict. The great wars and revolutions of the past century have, in large part, been over this question.

There are five functions an economic system performs in producing goods and services for consumption. These functions are:

1) How much to produce. The how much function relates to technical efficiency.

2) What to produce.

3) How to produce. The how function refers to the type of production techniques to be used. If we want technical efficiency and maximum output, we will always use the lowest cost method of production.

4) Who consumes.

5) Adaptability.