The main objective of a free economic system is to utilize the resources of the country in such a way that the production of goods and services out of the available resources may be optimal. In essence, an economic system is characterized by the supply and demand of commodities which may be consequently affected by scarcity and choice as described in the following paragraphs.
The market supply of a commodity is the total quantities that firms are willing to offer and sell over some time period. This implies that firms are economic agents responsible for supply of goods and services. Thus, the law of supply states that provided other conditions is kept constant, when the price of a commodity increases the supply increases and vice versa (Hardwick et al., 1999). In this way existing firms expand their outputs and new firms will join the industry so as to take advantage of increased profitability and consequently safeguard increases. When cost of production of any commodity rises, supply falls and vice-versa due to the scarce resources. Other factors that affect supply include the price of other certain goods, price of factors of production, state of technology, expectations, government policies, and tastes of producers.
Demand is the quantity an individual is willing to buy at a given price over a period of time. It takes authority in the following: ability, time, and price specification. Furthermore, demand as opposed to want, need or desire is backed by purchasing power. For this reason, the law of demand states that provided other conditions are kept constant, when a price of a commodity increases the quantity demanded decreases and vice versa; there is an inverse relationship between the price of a commodity and quantity demanded (Hardwick et al., 1999). Demand and supply of a commodity are affected by the scarcity of resources and the choices made by economic agents. Scarcity is a relative term and it means less than requirement. The main cause of economic problems is the scarcity of resources at the disposal of human beings e.g. time, money, wealth e.t.c. A commodity is considered scarce when it is limited in supply. Choice is a selection of wants to satisfy from an ending list of wants that is necessitated by the fact that resources are limited. If there is change in taste and preference of a consumer, demand will not increase in spite of fall in price level.
Hardwick et al. (1999) assert that the society is faced with the following problems due to scarcity and choice: 1. the products to produce and their relative quantities, 2. methods of production to be used, 3. how the society’s output of goods and services is divided among its members, and 4. how competent is the current production and distribution. Consequently, scarcity has two elements – our wants and our means of fulfilling those wants. These can be interrelated since wants are changeable and partially determined by society. The way we fulfill wants can affect those wants. The degree of scarcity is constantly changing. The quantity of commodities and resources depends on technology and people’s action, which bring about production. Individuals’ imagination, innovativeness, and willingness to do what needs to be done can greatly increase available goods and resources. This implies that, although there is an improvement in technology, scarcity cannot be entirely eliminated since new wants are constantly changing.
For instance, the production of food may be in thousands of tons, but it is scarce because it is less than the requirements. If any commodity is available in greater quantity as compared to its demand then it will not be scarce; a good example is air. Furthermore, much of what people do reflects their rational self-interest. Using the choice concept, two things determine what people do: the pleasure people get from doing or consuming something and the price of doing or consuming something.
Price is the tool the market uses to bring the quantity supplied to the quantity demanded. Varying prices present motivation for individuals to change whatever they are involved in. Though, those incentives in the invisible hands guide us all. To understand economics we must understand how price affects our choices. That’s why we focus on the effect of price on quantity demanded as explained in paragraph three. We want to understand the way in which a change in price will affect what we do. For instance, on certain items we are penny-pinchers; on others we are big spenders.
In light of this, all human wants cannot be satisfied due to scarcity of resources. If there are so many wants and resources are not sufficient then only a few wants will be satisfied and in this case, choice will be made. It means that preference will be given to some wants as compared to others. The wants which have greater importance will be satisfied through the right choice. In essence, as almost people cannot have all the goods and services that they want, they have to make choices due to limited supply. With no rise in income, if someone wants to buy, for instance, a new coat they may have to spend less on eating out for a while. Similarly with limited resources, if a country wishes to devote more resources to health care it will have to reduce the resources it devotes to, for example, education.
Therefore economic agents need to understand the economic system so as to tell the direction that the demand and supply of a product would take if there are problems caused by scarcity and choice. Since needs and wants are far more than the resources available to satisfy them, the choices we can make are constrained not only by scarcity but also by political, legal, traditional, and moral forces. In other words, there are numerous non-economic forces that determine and mold our decision-making process.
References
Hardwick, P., Khan, B., & Langmead, J. (1999). An Introduction to Modern Economy. Upper Saddle River, NJ: FT Prentice Hall.