WHAT IS ECONOMICS ALL ABOUT?
It is characteristic of any society that while wants of people are growing constantly, the economic resources required to satisfy these wants are limited and scarce. Economic resources may be classified as material resources ( raw materials and capital ) and labor resources ( labor force and entrepreneurship ). Scarcity of resources makes it necessary to save them. As a result any economic system is trying to find most effective and efficient ways of utilizing resources for the production of goods and services. The rational solution of the problem brings about the maximum economic growth, full employment, stable prices, equitable distribution of revenues, and social security of the needy.
There are different economic systems in the world today. Many economists argue that free enterprise, or the market economy is the most effective system, because businesses are free to choose whom to compete with. How can a market economy solve what, how and for whom to produce?
It is done through a market, which is a set of arrangements through which buyers and sellers make contact and do business, in which choices concerning the allocation of resources and transactions among members of society involving factors of production, incomes, goods and services are left to countless independent decisions of individual consumers and producers acting on their own behalf.
One of the main laws of the market is the law of supply and demand. It says that if demand exceeds supply, the prices tends to rise and when supply exceeds demand the prices tends to fall.
Given the scarcity of resources, the market functions as a rationing device with the price mechanism as its principal instrument. In free markets, prices direct allocations of inputs of firms that make the most profitable use of them. The price mechanism also guides the decisions of producers concerning the composition of their output. Finally, the price mechanism of demand and supply.
Thus, the market mechanism brings about an allocation of resources that reflects two basic factors : consumer preferences and production costs. The price which play the coordinating role of the market mechanism are determined through the interaction of demand and supply.
All business produce goods and services and seek profits. They all compete with other businesses for inputs of labor, capital and natural resources, including foreign partners.
Freedom of enterprise is not total the market economy. Businesses are subject to laws and government regulations.