In dealing with the question I am going to firstly define economic problem, using the source that I have adapted, talk about the scarcity problem that is needed to be concerned; relating it to an economic model, a free market economy, which is supported by Adam Smith’s viewpoints. Later, I will focus on the “price mechanism” as a social provisioning. In doing so I will attempt to show, using demand and supply diagram, what makes the market works so amazingly and how “selfish” interests of each individual are involved.
I will then mention a bit on how can the mechanism be applied to the labour market to emphasis the importance of such a mechanism. In contrary, I will also pay attention as to how and why would the self-interests effect to the society as a whole and discuss a conflict between self-interests and morality. Throughout my essay, I will illustrate the examples that have been extracted from the real world. In this due course, I will finish this essay by looking back at the contents of my essay and give my conclusion to see which would lead to the wealth of society, basing on my own personal opinions.
The article above paints a gloomy picture of what might happen in the future. It is hard to imagine the world without resouces left. In other words it is scarce and as more and more is used up there will come a time when no resource remains. ” The world’s oil took millions of years to form – we may use it all in little over a century!. ” If you make a list of your all your wants in the space I left above, you probably didn’t have enough space to write down everything you want, even if the whole paper would not have enough space.
What if we carried out this exercise with everyone in the world (more than 6 billion people! )?. Considering all the reasons I have mentioned above, you would find that resources are limited whilst human wants are infinite. This leads to the fundamental economic problem: insufficient goods and services to meet everyone’s needs i. e. scarcity. As society grow to include more people, human tastes and preferences continually grow, creating an inevitable conflict between the magnitudes of human wants and the availability of resources for satisfying them.
The tension between limited resources and unlimited wants makes the efficient use of resources especially critical and underscores the importance of optimising behaviour. Therefore, a free market economy should be imposed as an economic model so that the resources can be allocated efficiently to each economic actor. According to Adam Smith’s work, the “An Inquiry into the Nature and Causes of the Wealth of Nations.
One of the most important books on economics ever written, his work established economics as an autonomous subject and launched the economic doctrine of a free market economy. Smith argued that the state should not interfere with the functioning of the economy. It should adopt a free market economy. A free market economy is one of the economic systems, which attempt to solve the basic economic problem with a minimum of regulation and control by governments, and the allocation of resources is determined by very unique system called the price mechanism.
The reason why it is called the “price” mechanism is because the price acts as a signal and an incentive for producers to act in the require way so as to maximise their gain, which, in turn, optimises the allocation of resources in the whole economy. As the objective of social provisioning is to maximise everyone’s satisfaction, then this system achieves best because the system allows each individual to maximise their own benefits. In the market economy, there are four main types of economic actors in a market economy – consumers, workers, firms, and governments.
All economic actors in this system are motivated by pure self-interest where they are all aimed to maximise their own interests. Governments: Governments have traditionally been assumed to want to maximise the welfare of the citizens of their country. However, there is a limited government intervention in the market. In the price mechanism, the forces of demand, representing consumers, and supply representing producers, determine the value of prices of goods. The demand curve has a negative gradient, as there is an inverse relationship between price and quantity demanded.
This shows that the consumers would like to maximise their utilities while minimising the price they have to pay. In the other hand, the supply curve has a positive gradient, due to a direct relationship between price and quantity demanded. This means, the higher the price, the higher the quantity supplied. This is due to producers are motivated by profits. As consumers try to minimise the price and producers try to maximise the price, therefore every time the demand or supply change, the price will adjust automatically towards equilibrium. Adam smith refers this market forces as invisible hands.
The same analysis can be applied to labour markets. The firms would aim for keeping low wages to minimise cost of productions in order to maximise the firms’ profits, therefore a negative gradient of demand curve. The labours would prefer to obtain high incomes rather than low incomes i. e. maximising wages, therefore a positive gradient of supply curve. As a result of both workers’ and firms’ benefit maximisation (selfishness), the wages will adjust automatically towards equilibrium, whenever the demand of labour or supply of labour changes.