Economic bubbles and mass business failure 4. To what extent free-market economy approach would generate greater economic growth and ensure economic efficiency in the developing countries, only the future will tell. An economic problem is basically the problem of choice which arises because of scarcity of resources. Mass bankruptcy filings and insolvency 3. Causes of Economic Problem: Prof. Lionel Robbins in his famous book, “An Essay on the Nature and Significance of Economic Science” (1932), has given the following reasons for the emergence of economic problem. As confidence recedes, so does demand. Problems: Causes and Connections What are key environmental problems and their root causes? Commercial crimes and intentional or planned corporate offenses 6. The branch of economic theory which explains how the relative prices of goods are determined is called Microeconomic Theory or Price Theory and has been the concern of economists from the earliest days of economics. It is important to note that the distribution of national product depends upon the distribution of money income. On the other hand, production with automatic looms uses relatively more capital and less labour. After the marginalist revolution in economic theory, theory of distribution has been boiled down to the theory of factor pricing which is an important part of the price theory or what is now popularly called microeconomic theory. Wants of the people are unlimited and keep on multiplying and cannot be satisfied due to limited resources. Share Your Word File Besides the economy may have achieved technological efficiency in the use of its resources for the production of goods but its pattern of production may not conform to the consumers’ preferences so that there are long queues outside the markets or stores selling commodities whose level of production has been quite insufficient or inadequate as compared to the wants of the consumers for them. Now, the incomes can be earned either by doing some work or by lending the services of one’s property such as land, capital. 1. 9 causes of slow economic development in Pakistan. But economic resources are unequally scarce; some are more scarce than others. Privacy Policy3. Prohibited Content 3. Thus a community will not consciously allow the resources to lie idle. At such times, factories which can employ people are there, but they are not working. Cities and the urban regions incorporated less than 5% of the world population. The theory of distribution viewed as the theory of factor pricing deals with the functional distribution of income rather than the personal distribution of income, since it explains only how the prices of factors, that is, wages of labour, rent of land, interest on capital and profits of entrepreneur are determined. It is with this regard that the concept of sustainable growth or sustainable development has been put forward which implies that if severe damage is done to the environment and resources and if because of reckless industrialisation resources are not conserved for future, economic growth in the future will be limited. For example, petrol is used not only in vehicles, but also for running machines, generators, etc. In our daily life, we have various forms of scarcity. Keynesian analysis has greatly widened the scope of economic theory and improved our understanding of the working of the capitalist economic system which suffers from large fluctuations in economic activity. Those people who have larger incomes would have larger capacity to buy goods or to use Prof. Amartya Sen’s phrase, would have larger entitlement for goods and hence will get greater share of output. The production would be economically inefficient if it is possible by rearranging the allocation of resources to increase the production of one good without reducing the output of any other. By the year 2000, 47% of the total population started residing in urban areas. The producers in a free-market economy, motivated as they are by profit considerations, take decisions regarding what goods are to be produced and in what quantities by taking into account the relative prices of various goods. But the question which we raised, namely, “how the national product is distributed among the various individuals that comprise a society” is not fully answered by the theory of functional distribution. Those who have low incomes would have less purchasing power to buy things and will therefore be able to obtain a small share of output. Due to this reason, people allocate their resources in order of preference to satisfy some of their wants. ... High unemployment causes less consumption of goods and services and less tax payments results in higher government borrowing requirements. Report a Violation, Problems Faced in Human Resource Planning, The Production Possibility Frontier (PPF): Assumptions, Characteristics and other Details. Answer. Uncontrolled d… It is worth noting that a society that has achieved technological efficiency, that is, making full and most effective use of its available resources may not have attained economic efficiency. 3. If the economy is producing wrong-mix of goods, then through reallocation of resources among them it will be possible to make some people better off without any one worse off. Copyright 10. Resources are not only scarce, but they can also be put to various uses. 2. The need of man is unlimited. Invariably, this would le… Lack of seasonal rainfall: Any abnormalities with the seasonal rainfall also can cause some serious poverty problems. Scarcity of resources demands that goods should be produced with the most efficient method. Why one method of production is used rather than another and consequences of the method used are dealt with in the Theory of Production. Therefore, all human wants cannot be satisfied with limited means. This is because resources being scarce, a community will try to use all the available resources to achieve maximum possible satisfaction of the people. “An Enquiry into the Nature and Causes of the Wealth of Nations “threw light on the subject. The economic problems in Nigeria have always been a topic of discussion in schools, social platforms, and even the national assembly. The first and foremost basic problem confronting an economy is “What to produce” so as to satisfy the wants of the people. This branch of economic theory which deals with the problem of employment of resources (and thus with the determination of national income) is called Macroeconomic Theory. Prof. A. K. Dassgupta rightly remarks “Distribution appears an extension of the theory of value, being just a problem of pricing of factors of production. Whatever the type of economy, be it capitalist, socialist or mixed, a decision has to be made regarding allocation of resources. As said above, all of them arise from the fundamental problem of scarcity. Since the distribution of the ownership of property is an institutional factor. Therefore, mainstream economic theory assumes free market system and explains how the above six problems are solved by it and with what degree of efficiency. But because resources are in fact scarce relative to human wants, an economy must choose among various goods and services. “Inequality” is an easy, but sometimes misleading term used to describe the systemic barriers leaving groups of people without a voice or representation within their communities. The real fundamental causes are those that lie behind the assembling of the powder.’. Overpopulation is an undesirable condition where the number of the human population exceeds the carrying capacity of Earth. Content Filtrations 6. Economic Recession: Causes, Effects, and Possible Solutions Published on October 18, 2016 October 18, 2016 • 16 Likes • 2 Comments For instance, the production of cloth with handloom would make use of relatively more labour and less capital. Keynes’ explanation was that unemployment of labour at that time was found not because money wages were fixed at higher levels by the activities of strong labour unions and intervention of the Government but because of the fall in aggregate effective demand for goods and services. It is the basic reason for existence of economic problems in all economies. => We face a number of interconnected environmental and resource problems. This is because if technical efficiency in the use of resources is not achieved, it would then be possible to make some people better off by increasing production through fuller and better utilisation of resources without making others worse off. such a manner that tackling them separately will not overcome the problem unless the socio-technical nature ofthe causes are recognized and tackled in a holistic way. Causes of Economic Growth: In the short term, an increase in aggregate demand may stimulate a rise in output if the economy has unused resources. Is the economy’s productive capacity increasing, declining or remaining static over time? Similarly, fields can be irrigated (and hence wheat can be produced) by building small irrigation works like tube wells and tanks or by building large canals and dams. The old tripartite division of factors into land, labour and capital is retained but their old association with social ‘classes’ is lost. His theory of deficiency of effective demand causing recession and resulting in involuntary unemployment of labour and underutilisation of capital stock has played an important role in the formulation of economic policies to control fluctuations in economic activity. Scarcity is the root cause of all our economic problems. Disclaimer Copyright, Share Your Knowledge It may be noted that the concept of economic efficiency explained above was put forward by the Italian economist Vilfredo Pareto (1848-1923) and is therefore also called Pareto Optimality. Economic competition between capitalist groups leads to the encroaching on the markets and resources of foreign rivals, and governments retaliate with tariffs, quotas, subsidies and other methods of excluding goods from the market. Thus, with the given scarce resources, if the society decides to produce one good more, the production of some other goods would have to be cut down. What determines the allocation of resources and what are the results of attempts made to change the allocation has occupied the minds of economists from the very beginning of our economic science. Therefore, it has to decide whether cloth is to be produced by handlooms or power looms or automatic looms. How did it come about became a controversial question at that time. Before publishing your Articles on this site, please read the following pages: 1. Economic theory studies how these decisions are arrived at in various societies. It is very important to know whether the productive capacity of an economy is increasing. The six questions listed above have been the concern of economic theory from time to time. 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