Economics · Classes 9-10 · Chapter 1 · 1.6

Fundamental Economic Problems and the Capitalistic or Market Economic System.

You have a field, some workers and some money, but you want both rice and cloth. You cannot do everything at once. That squeeze raises three questions, and the market system answers all three without anyone giving orders, just by the signal of prices.

1. Limited resources, unlimited wants

Resources are limited, but wants are unlimited. This limit on resources is called scarcity, and it is the economic reality of life. The fundamental economic problems arise from this gap.

There are three problems. One: what should we produce and what not? For example, rice or cloth. Two: how should we produce, that is, with what technology? A labour-intensive loom or a capital-intensive machine. Three: for whom should we produce, who will consume it?

2. Four systems, and capitalism

On the basis of how these problems are solved, four economic systems have grown up: capitalist or market, socialist or command, mixed, and Islamic. This note is about the first.

Where the means of production are privately owned and all activity runs mainly through private enterprise and the automatic price mechanism, without government interference, we have the capitalist (market) economic system.

Capitalism began across Europe in the late eighteenth century, through the French Revolution. The classical economist Adam Smith and his followers supported this system.

3. The eight features of capitalism

1. Private ownership of resources: most resources, the means of production, are in private hands, and owners may transfer and use them. 2. Private enterprise: production, exchange, distribution, consumption and most other activity run on private initiative, so government interference is not wanted.

3. Free competition: many firms compete freely, so prices stay low and new discoveries become possible. 4. Automatic price mechanism: prices are set in the market by bargaining between buyers and sellers.

5. Profit motive: the producer produces to earn the maximum profit. 6. Consumer liberty: every consumer buys and uses goods freely by their own choice, wish and taste, and producers supply goods according to demand and the chance of profit.

7. Income inequality: the gap between the wealthy and ordinary people is large, and some unemployment is unavoidable. 8. Role of government: the government is engaged in maintaining law and order, defending the country and protecting property rights.

The system runs on mutual dependence. Nobody acts selflessly; each person does economic work for their own interest, not for public welfare.

Now eight chips. Which are features of capitalism, and which are traps from other systems?

4. How the market answers the three questions

First see the second question in action: which technology, the loom or the machine? Change the wage and see which wins.

In capitalism the three opening problems are settled by no order, but by the logic of the market. Open the questions one at a time.

Now the first question, what to produce. Drag the buyers' demand from rice towards cloth, then look at prices and producers.

The answer to the first question happens like a chain. Put the five steps from consumer to producer in order.

5. Check yourself

The first question is a plain one.

In the second, keep the features apart.

The third recalls the chain once more.

The whole note on seven cards.

Source: Economics, Classes 9-10 (NCTB), Chapter 1 “Introduction to Economics”, section 1.6.