1 : 17:33 @ 39% docs.google.com In-Class Assignment-1. Chapter-1. What is Economics? THREE FUNDAMENTAL QUESTIONS OF ECONOMICS A broad perspective on the discipline of economics can be obtained by focusing on what might be called the three fundamental questions of economics: What? How? and For whom? That is, economics is about what and how much gets produced, how it is produced, and who gets it. What to Produce? The underlying the question of what should be produced is the reality of scarcity Any society has only a fixed amount of resources at its disposal. Therefore, it must have a system in place to make an endless number of decisions about production, from big decisions-such as, should government buy more military aircraft or build more hospitals?-down to more mundane decisions such as how many brands of breakfast cereal will be produced if we decide to produce hospitals, should we produce ten without research facilities for the study of genetics, or eight without and two with such facilities? Should society exploit natural resources faster to create more jobs and more tax revenue, or slower to conserve these resources for the future? Should our resources be directed toward more preschool day-care facilities so that parents are not so tied to the home? Or, instead, should those same resources be directed toward increasing the number of graduate students studying science and technology so that the Canadian economy can win the competitive international race in the twenty-first century? Let us once again emphasize that no economist would claim to have the right answer to any of these questions. That is no more the role of an economist than it is of any other member of society. What the economist can do, however, is identify and measure both the benefits and the costs of any one answer of any one choice. Page-2: In-Class Assignment-1 How to Produce? Let us move on to the second fundamental economic question that every society must somehow answer: What is the most appropriate technology to employ? We could reword this question by asking how we should produce what we choose to produce For example, there are many ways to produce 10 kilometres of highway. At one extreme, a labour-intensive method of production could be used involving rock crushed with hammers, roadbed carved from the landscape with shovels, and material moved in wheelbarrows. The capital equipment used in this method is minimal. The labour used is enormous, and the time it will take is considerable. At the other extreme, a capital-intensive method could be used involving large 1 , 17:34 @ 39% docs.google.com could reword this question by asking how we should produce what we choose to produce. For example, there are many ways to produce 10 kilometres of highway. At one extreme, a labour intensive method of production could be used involving rock crushed with hammers, roadbed carved from the landscape with shovels, and material moved in wheelbarrows. The capital equipment used in this method is minimal. The labour used is enormous, and the time it will take is considerable. At the other extreme, a capital-intensive method could be used involving large earthmoving and tarmac-laying machines, surveying equipment, and relatively little-but more highly skilled-labour. In between these two extremes is a large variety of capital-labour mixes that could also produce the new highway. The answer to the question of how best to build the highway involves, among other things, knowing the costs of the various resources that might be used. Remember that technology means the way the various factors of production are combined to obtain output. The most appropriate technology for a society to use (the best way to combine resources) depends, in general, on the opportunity costs of these resources. Thus, in the example above, the best way to build a highway depends on the opportunity costs of labour and of capital as well as the productivity of each factor. Page-3: In-Class Assignment-1 For Whom? Let us now move to the third fundamental economic question that every society must somehow answer: For whom? Here we are asking how the total output of a society should be shared among its citizens. In the end, we are really asking how the total income in a society should be distributed. Should it involve an equal share for allor should it, perhaps, be based on people's needs? Alternatively, should it be based on the contribution of each member of society? If so, how should this contribution be measured-in numbers of hours, or in skill level, or in some combination of these two? Further, how should we define what constitutes an important skill and which ones are less important? Wrapped up in all this is the question of the ownership of resources and whether it is better for certain resources (such as land and capital) to be owned by society as a whole or by private individuals. In short, the for whom question cannot be adequately addressed unless we look at society's attitude toward the private ownership of resources and the question of who has the power to make crucial decisions You can see that in addressing the for whom question, other questions about the role of income distribution, Incentives, and the ownership of resources all come Into play, John Stuart Mill pointed out, nearly 150 years ago, that once an economy's goods are produced and the initial market distribution of income has occurred, society can intervene in any fashion it wishes in order to redistribute such income, that is, there are no laws of distribution other than the ones that society wants to impose. Whether this observation by Mill gives enough consideration to the incentive for productive effort remains an open question to this day. 1 : 39% 17:34 docs.google.com Page-3: In-Class Assignment-1 For Whom? Let us now move to the third fundamental economic question that every society must somehow answer: For whom? Here we are asking how the total output of a society should be shared among its citizens. In the end, we are really asking how the total income in a society should be distributed. Should it involve an equal share for all, or should it, perhaps, be based on people's needs? Alternatively, should it be based on the contribution of each member of society? If so, how should this contribution be measured-in numbers of hours, or in skill level, or in some combination of these two? Further, how should we define what constitutes an important skill and which ones are less important? Wrapped up in all this is the question of the ownership of resources and whether it is better for certain resources (such as land and capital) to be owned by society as a whole or by private individuals. In short, the for whom question cannot be adequately addressed unless we look at society's attitude toward the private ownership of resources and the question of who has the power to make crucial decisions. You can see that in addressing the for whom question, other questions about the role of income distribution, Incentives, and the ownership of resources all come into play. John Stuart Mill pointed out, nearly 150 years ago, that once an economy's goods are produced and the initial market distribution of income has occurred, society can intervene in any fashion it wishes in order to redistribute such income, that is there are no laws of distribution other than the ones that society wants to impose. Whether this observation by Mill gives enough consideration to the incentive for productive effort remains an open question to this day. Questions In-Class Assignment-1. Chapter- 1. What is Economics? Discussion Questions Describe how can you obtain a broad perspective on the discipline of economics? There are three basic questions of economics. Explain each one of them 1. What to Produce? 2. How to Produce? 3. For Whom to Produce