Economic Systems

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1. What does the term "economizing problem" mean for an individual and for society? Include the four economic resources and the opportunity cost in your answer. Also define by example (one sentence each) the following: "other things equal" assumption, productive and allocative efficiencies, and consumer sovereignty. 2. Explain how the market system provides a strong incentive for technological advance and creative destruction. Within your answer, provide three virtues of the market system. How does the circular flow model fit into this discussion? Please be specific and use examples.

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The economizing problem is an economic theory about the relationship between supply and demand that has evolved from the writings of Austrian philosopher Ludwig Von Mises (1881-1973). After establishing himself as a classic liberal economist at the Austrian School, he migrated to the United States in 1940, facilitated by a...

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The economizing problem is an economic theory about the relationship between supply and demand that has evolved from the writings of Austrian philosopher Ludwig Von Mises (1881-1973). After establishing himself as a classic liberal economist at the Austrian School, he migrated to the United States in 1940, facilitated by a grant from the Rockefeller Foundation. Mises opposed imperialism, in which a nation invades other countries with the intent of seizing resources.

An influential 1912 book by Mises called The Theory of Money and Credit was an extension of a research program started by the father of capitalism, Adam Smith. The book foreshadowed the creation of America's financial engine for corporate and government borrowing, the Federal Reserve, the following year. He emphasized that when governments print money, it plays a role for investing in resources, which affects corporate production and, ultimately, consumer choices.

When resources become scarce, it raises the question of how commercial entities can meet the demands of consumers for unlimited choices. Mises suggested that consumers and producers should act in harmony with each other to resolve issues of scarcity without a monopoly taking over the marketplace. He believed that government-enforced monopolies and cartels created major disadvantages for consumers. He viewed consumers as voters on products, services and prices.

Questions of fairness arise when one corporation, such as De Beers, which formally held a monopoly in the diamond business, can dictate market prices by creating artificial scarcity. Diamonds were not in great demand from the American middle class until De Beers used Hollywood movies and other media to promote diamonds as wedding gifts.

The 1947 advertising slogan "a diamond is forever" helped create a surge in demand, which caused prices to skyrocket. It should be noted that diamonds are made of carbon, one of the most abundant elements on earth. Since De Beers controlled the diamond market, it essentially had control of prices.

When scarcity of raw materials occurs, such as the oil crisis of the 1970s, caused by OPEC cutting production in retaliation to weapons trade between the United States and Israel, it can have a domino effect in disrupting the entire economy. Oil prices shot up so high that many Americans began to cut back on consumption by riding in carpools or taking public transportation. High prices due to limited resources can lead to consumer resistance, which producers must keep in mind. A drought, as another example, can drive up food prices to the point of consumers switching choices for groceries.

These imbalances between supply and demand force businesses to make huge decisions about how they should allocate resources efficiently to meet consumer demand and the company's goals. Cost efficiency in production is a major factor in wholesale and retail pricing, which is the key to what brings consumers and producers together. A win-win for consumers and producers is the ultimate solution for solving the economizing problem. While buyers care about convenience, quality, and efficiency, producers must be concerned about employment levels, fixed resources, fixed technology, and productive efficiency.

The economizing problem for the individual comes down to their reaction scarcity, choice, trade-offs, optimal allocation, and opportunity cost. The economizing problem for society is reflected by production solutions, employment issues, and economic growth.

The "other things equal assumption" regarding price and quantity suggests that consumers who have high demand for a product will pay a higher price if it's in short supply, which may be indicated by limited retail shelf space. Electric car manufacturer Tesla, for example, can only manufacture so many units per year. As a premium brand that dominates competitors, it has developed a waiting list of customers ready to pay premium prices.

The market system provides a strong incentive for technological advance for early adopters of premium products, such as the Tesla Model X, an electric car that stands for sustainability and luxury. The federal government has helped create demand by offering tax credits of $7,500 for the company's electric vehicles.

Creative destruction will occur with Tesla when it comes time to revamp its manufacturing process to create more powerful and cleaner batteries. Three significant virtues of the market system that allow for increased sales and market share are consumer demand for innovation, sustainability, and efficiency. These virtues are supported by Tesla's vision to help disrupt the automobile market with environmentally-friendly vehicles that allow consumers to drive over three hundred miles on one charge.

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The economizing problem describes the intrinsic limitations caused by the existence of limited resources within a consumer market of unlimited wants. Individuals operate in a competitive marketplace where scarcity of goods and services determines their availability and price. Society manufactures and produces goods and services within the limitations of resource scarcity, which constrains what and how much of a product can be offered and at what price.

The four economic resources—land, labor, capital, and entrepreneurship—are the materials from which goods and services are produced and through which consumer demands within conditions of scarcity—limited resources, unlimited wants—are fulfilled. Consumer sovereignty holds that consumer wants determine what is produced because the "penny" is the "vote." However, recent science research, such as on household goods containing phthalates, suggests the weakness of this economic assumption.

The cost of making choices within the limitations imposed by scarcity is the opportunity cost of participating in an economic marketplace. Opportunity cost is the amount of something else that cannot be produced or acquired in order to produce or acquire one unit of something desired. The opportunity cost of having a Mercedes sports car may be accepting the presence of two roommates. When changes are considered for production or for consumption, "all other things being equal" is the assumption that all other factors, those indirectly related to the considered change, remain constant and unchanged. For owning the Mercedes, "all things being equal" means that only assessment of the impact of the change on your level of satisfaction is considered. Productive efficiency, the assumption that the least costly resources have been used in production, and allocative efficiency, the assumption that those goods and services offered are those most wanted by the consumer, are corollaries to the economizing problem of scarcity and to the calculation of opportunity cost.

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The market system provides strong incentives for technological advance and creative destruction because of the importance of the profit motive in that system.  Firms try their hardest to make the things that people want.  This promotes technological advance and creative destruction.  Let us look at how this works with reference to the three main virtues of market systems.

Efficiency.  Market systems direct resources to the goods and services that people want to buy.  This promotes technological advance because it allocates resources to those firms that are making new technologies that people want.  It promotes creative destruction because it can replace firms with new firms that are better at giving people what they want.

Incentives.  Market systems give people and firms the incentive to make new technologies because those technologies can allow the people and firms to make profit.  The market also encourages creative destruction because it encourages innovations which lead to profit.

Freedom.  Market systems allow for technological advance and creative destruction because they give people the freedom to do what they want with their property.  This allows people to use their property to make new kinds of technology and new firms.

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