Balancing Needs and Resources in Society

People in society need many goods and services in their everyday lives including food, clothing, shelter, transport facilities like roads and railways, postal services and various other services like that of teachers and doctors. No individual as well as the society at large has unlimited resources (land, grains etc.) compared to their needs.

Everyone faces scarcity of resources, and therefore, has to use the limited resources in the best possible way to fulfill her needs. Therefore, there has to be some compatibility between what people in society collectively want to have and what they produce. The allocation of limited resources and the distribution of the final mix of goods and services are two of the basic microeconomics problems faced by society. 

Core Challenges of an Economy: Balancing Act

• Production, exchange and consumption of goods and services are among the basic economic activities of life. 
• In the course of these basic economic activities, every society has to face a scarcity of resources and it is the scarcity of resources that gives rise to the problem of choice.

Problems Related to microeconomics: Balancing Production, Resources, and Distribution

• Production and Quantity: Every society has to decide on how to use its scarce resources. 
  • It raises a trade-off between food, clothing, housing and more luxury goods, agricultural goods and industrial products and services.
  • It uses microeconomics resources in education and health or more resources in building military services, investing in consumption goods or having investment goods (like machines) which will boost production and consumption tomorrow.

• Method of Production: Every society has to decide on whether to use more labour or more machines and which microeconomics technologies to adopt in the production of each of the goods.

• Allocation of Scarce Resources: Every economy faces the problem of allocating scarce resources to the production of different possible goods and services and of distributing the produced goods and services among the individuals within the microeconomics economy. 

• • The allocation of scarce resources and the distribution of the final goods and services are the central problems of any microeconomics economy.

Organization of Economic Activities: Market Forces vs. Central Planning

Basic problems can be solved either by the free interaction of the individuals pursuing their own objectives as is done in the market or in a planned manner by some central authority like the government. 

The Centrally Planned Economy: Government Planning for Societal Well-being

In this, the government or the central authority plans all the essential activities in the economy. 

• Government Control and Decision-Making: The Central government may make decisions regarding production, exchange and consumption of goods and services and their distribution which is thought to be desirable for society as a whole. 
• Example: Education or health services.
• Planning in Key Sectors: The government might try to 
  • Induce the individuals to produce an adequate amount of goods and services or
  • May itself decide to produce that good or service or 
  • May intervene and try to achieve an equitable distribution of the final mix of goods and services to the needy.

The Market Economy: Pricing, Coordination, and Economic Choices

• Market-Centric Microeconomics Organization: In a microeconomics-driven market economy, all economic activities are organized through the market. 
  • Settings for Buyer-Seller Interaction: In market interaction between buyers and sellers can occur in various situations, from open village chowk to super bazaar or through telephone or internet and conduct the exchange of commodities. 
• Important Role of Market Arrangements: The arrangements which allow people to buy and sell commodities freely are the defining features of a market. 
• The Pricing Mechanism and Social Valuation: In a microeconomics market system, all goods or services come with a price (which is mutually agreed upon by the buyers and sellers) at which the exchanges take place. 
  • The price reflects, on average, the society’s valuation of the good or service in question. 
• Price-Induced Production Decisions: If the buyers demand more of a certain good, the price of that good will rise. 
  • This in turn will influence producers to increase their production. 
• Information Transmission through Prices: In this way, prices of goods and services send important information to all the individuals across the microeconomics market 
  • Coordination in Microeconomics Market Economies: It helps to achieve coordination in a microeconomics market system.
  • Resolving Production and Allocation Challenge: Price signals also help in solving the central microeconomics problems regarding how much and what to produce are solved through the coordination of economic activities brought about by the price signals. 

The Mixed Economy: Government and Market in Mixed Economies

• Introduction: In reality, all economies are mixed economies.
  • Here some important decisions are taken by the government and,
  • The economic activities are by and large conducted through the market. 
• Degrees of Government Intervention: The only difference is in terms of the extent of the role of the government in deciding the course of economic activities. For example, 
  • United States of America (USA): Here, the role of the government is minimal.
  • China: It followed a centrally planned economy for the major part of the twentieth century. 
  • India: Since Independence, the government has played a major role in planning economic activities. 
    • However, the role of the government in the Indian economy has been reduced considerably in the last couple of decades.

Positive and Normative Economics: Economic Analysis

• Introduction to Economic Analysis: In microeconomics, Our aim is to analyse the different mechanisms and figure out the outcomes which are likely to result under each of these mechanisms.
• Outcome Prediction and Mechanism Analysis: To evaluate the mechanisms by studying how desirable the outcomes resulting from them are. 
• Evaluating Desirability of Outcomes: Often a distinction is made between positive economic analysis and normative economic analysis depending on whether we are trying to figure out how a particular mechanism functions or we are trying to evaluate it. 
  • Positive Economic Analysis: It is to understand how the different mechanisms function.
  • Normative Economic Analysis: To understand whether these mechanisms are desirable or not. 

• The Blurred Line: This distinction between positive and normative economic analysis is not very sharp.

• • The study of the central economic problems are very closely related to each other and a proper understanding of one is not possible in isolation from the other.

Microeconomics and Macroeconomics: Economic Perspectives

Market Dynamics: Microeconomics Agents and Price Mechanisms

• Microeconomics studies the behavior of individual economic agents in the markets for different goods and services.
• It also aims to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these microeconomics markets. 

Economic Overview: Macroeconomic Forces and Performance Metrics

• It is an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level. 
• It also studies the behavior of aggregate or macro measures of the performance of the economy.
• Some of the topics that are studied in macroeconomics are as follows:
  • The level of total output in the economy,
  • Method of measuring total output and its growth over time and 
  • Employability of the resources of the economy (e.g. labour), reasons behind the unemployment of resources and reasons of price rise. 

Conclusion

• We have discussed the microeconomics problem of managing the resources of an economy and the opportunity cost associated with them. 
• We have also discussed various microeconomics methods of managing and distributing these resources among people through the involvement of the government or on a free market basis.