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Scarcity as the Basic Economic Problem Essay

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Updated: Jul 4th, 2021

Introduction

Dealing with economic questions is a highly significant element of any government’s work. In order to provide citizens with the necessary goods and services, it is crucial to analyze the economic situation and allocate resources correctly. The current paper focuses on scarcity as the basic economic problem and on different approaches to solving this issue.

The Basic Economic Problem

The basic economic problem faced by all persons, businesses, and countries is scarcity (Hoang & Ducie, 2018). In every country, there is a limited amount of resources. Thus, governments have to come up with decisions concerning allocating such resources to provide individuals with the necessary amount of supplies. Scarcity is present in every economy (Hoang & Ducie, 2018). Economics is the science that investigates how limited resources can be distributed to meet the unlimited wants and needs of people, organizations, and governments. In regards to the basic economic problem, there are three main decision-makers in the economy: individual persons or households, companies (businesses operating in the private sector), and governments (Hoang & Ducie, 2018). All of these agents cooperate with one another to answer the major economic questions:

  • what goods or services should be produced?
  • how should the services and goods be produced?
  • for whom should they be produced?

Market Process vs. Command Process Approaches to the Problem

The major difference between the market and command economy is in the allocation of power over production (McEachern, 2018). In the market process, private companies are responsible for all the production. In the command process, the production is regulated by the government officials’ plans. Another divergent feature in the two approaches relates to the degree of government involvement. In a market economy, the engagement of the government is not present at all (McEachern, 2018). In a command economy, the government owns all the resources. One more difference between the approaches is the division of income (McEachern, 2018). In a command economy, it belongs to the government that further decides how to allocate the money. In a market economy, all profits go to the resource owners.

The Difference Between Economic Profits and Accounting Profits

Both economic and accounting profits signify the difference between costs and revenue. However, there are some differences in the way these approaches measure an organization’s financial stability (Robinson, Henry, Pirie, & Broihahn, 2015). While accounting profit is calculated by GAAP (generally accepted accounting principles), economic profit is not. Accounting profit is the difference between the total revenue and the explicit costs (Robinson et al., 2015). Meanwhile, economic profit deals with implicit costs, also known as opportunity costs, and relies on organizations’ own resources.

The Role of Implicit (Opportunity) Costs in Investment Decisions

It is crucial to take into account implicit costs when making investment decisions. An opportunity cost is a cost that appears when a firm designates internal resources for an enterprise without explicit reimbursement for the use of resources. An example of considering the opportunity costs in investment decisions is spending time and resources on maintenance works rather than investing them in a new project. Another example of implicit costs is spending time on training a new worker upon hiring him.

Conclusion

Scarcity is the main economic problem faced by all persons, businesses, and countries. In order to overcome this issue, a variety of approaches is used. The most widely used processes are market and command ones. An important role in this area belongs to economic and accounting profits and explicit and implicit costs.

References

Hoang, P., & Ducie, M. (2018). Cambridge IGCSE and O level economics (2nd ed.). London, England: Hodder Education.

McEachern, W. A. (2018). Contemporary economics (4th ed.). Boston, MA: SOUTH-WESTERN CENGAGE Learning.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis (3rd ed.). Hoboken, NJ: Wiley.

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IvyPanda. (2021, July 4). Scarcity as the Basic Economic Problem. Retrieved from https://ivypanda.com/essays/scarcity-as-the-basic-economic-problem/

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1. IvyPanda. "Scarcity as the Basic Economic Problem." July 4, 2021. https://ivypanda.com/essays/scarcity-as-the-basic-economic-problem/.


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IvyPanda. "Scarcity as the Basic Economic Problem." July 4, 2021. https://ivypanda.com/essays/scarcity-as-the-basic-economic-problem/.

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IvyPanda. 2021. "Scarcity as the Basic Economic Problem." July 4, 2021. https://ivypanda.com/essays/scarcity-as-the-basic-economic-problem/.

References

IvyPanda. (2021) 'Scarcity as the Basic Economic Problem'. 4 July.

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