Firstly, the economic problem is split into three questions, which are: what to produce? How to produce? Who to produce for? These three questions can also be summed up as scarcity which is the inadequate amount of resources available. Consumers have wants which are unlimited; they would always want more, but due to the economic problem, scarcity, not everyone will get there ‘want’ fulfilled, therefore causing a problem. Different countries can attempt to overcome the economic problem in several ways; which is to apply a different economy system to their country.
Due to scarcity consumers will now have to make a choice of what they want, by sacrificing the next best alternative when making a decision, this is known as opportunity cost. This is an example of an opportunity cost. “Airport operators like the GMR-led DIAL and GVK-led Mumbai International Airport Limited (MIAL) have argued that they could have invested the money raised in the form of security deposits from this land in any other venture they wanted. ” Vikas Dhoot. (2012). Airport operators want opportunity cost for land security deposits. Available: http://articles. economictimes. ndiatimes. com/2012-01-27/news/30670362_1_security-deposits-airport-operators-airport-project. Last accessed 26th October 2012. Scarcity is fluctuated by the factors of production, when there is little factor of production the higher the scarcity and when higher the factor of production the lower the scarcity level. Factor of production combined create goods and services for consumers; these factor of production consist of labour, land, capital and enterprise. Labour are the individuals/employees who are part of this project to create goods and services for consumers.
Labours are awarded with wages/salaries for their human effort in production. Land is the natural resource available, and this could be let out to firms, as the firm would pay them back via rent. Capital are assets used to produce goods, these are things as machinery, vehicle, factories. Finally, enterprise, someone who is initiative, risk taker and good leadership skill, as they are the one who created this project in first place to provide goods and service, maybe in order to maximise profit. Example of good entrepreneur is Steve Jobs who was all behind the creation of Apple and the success of it.
Factors of production causes scarcity which in turns leads to people making choices due to the economy problem in the country; however countries do follow economy system to try and overcome these problems. These are: free market economy; mixed economy and command economy. All three handle with basic economic problem differently and are applied in many different countries. Free market economy is an economy system which is controlled by supply and demand and has very little or non-government influence. Hong Kong has been one of the freest market economy countries in the world. This year, however, several government moves have sparked renewed debate as to whether Hong Kong is abandoning its laissez-faire principles. ” Cathy Yan. (2010). Face Off: Is Hong Kong Still a Free Market?. Available: http://blogs. wsj. com/hong-kong/2010/12/20/is-hong-kong-still-a-free-market/. Last accessed 26th October 2012 Some of the characteristics of the free market economy are that everyone is out there to make gains and maximise on them gains. The firms will maximise profit and consumers would have gained a good or service that they wanted.
Majority of country’s factor of production, land, are owned by a third party. They will be the private owner of the land which in turn they could rent out to a firm, to place their business in order to produce goods and service. The private owner would then get rent and will hope to maximise profit through the process, this also limits the government’s role. Since there is little or no government influences in free market economy, firms are able to sell anything they want but it is mainly productions of customer’s want.
It’ll be a free enterprise so no dictatorship telling labours where they have to work, labours can take any job they want. Also with no barriers to entry or exit it is easy for competition to enter the market and it will be a highly competitive market. Consumers will be looking for which firm can offer them the best deal on their wants whereas firms will be competing for customers and suppliers. Firms may have to give more to the suppliers in order to get them attracted to the firm and decrease price in order to attract consumers.
Having competition it may be beneficial to a firm as they may be able to get ideas from a rival firm and yet do better than them. “Consider Microsoft’s standard practice of absorbing any new and interesting technology into their operating system. In DOS 6 it was disk compression. In Windows 3. 11 it was network file access. In Windows 98 the target was the web browser. In Windows XP it may well be streaming multimedia. It’s very hard to exist in a marketplace when one of your competitors is more or less giving away your