Text 2. The Role of the Market

Economics is the study of how society decides what, how, and for whom to produce.

PART 5. TEXTS FOR READING AND DISCUSSION

Text 1. Economics – A Science or a Subject within the Humanities?

Every group of people must solve three basic problems of daily living: what goods and services to produce, how to produce these goods and services, and for whom to produce these goods and services.

By goods we mean physical commodities such as steel, cars, and strawberries. By services we mean activities such as massages or live theatre performances which can be consumed or enjoyed only at the instant they are produced. In exceptional circumstances, society may find some of the questions about what, how, and for whom to produce have already been answered; until the arrival of Man Friday, Robinson Crusoe need not worry about the ‘for whom’ question. In general, however, society must answer all three questions.

By emphasizing the role of society, our definition places economics within the social sciences, the sciences that study and explain human behaviour. The subject matter of economics is that part of human behaviour which relates to the production, exchange, and use of goods and services. The central economic problem for society is how to reconcile the conflict between people’s virtually limitless desires for goods and services, and the scarcity of resources with which these goods and services can be produced. In answering the questions what, how, and for whom to produce, economics explains how scarce resources are allocated between competing claims on their use.

Because economics is about human behaviour, you may be surprised that we describe it as a science rather than a subject within the arts or humanities. This reflects the way economists analyse problems, not the subject matter of economics. Economists aim to develop theories of human behaviour and to test them against the facts.

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1. What are the three basic daily problems people to decide according to the text?

2. Comment on the definition of economics.

3. Define goods and services.

4. Is economics a social science?

5. Is economics a science or a subject within the humanities? Why?

6. What is the central economic problem for society?

Markets bring together buyers and sellers of goods and services. In some cases, such as a local fruit stall, buyers and sellers meet physically. In other cases, such as the stock market, business can be transacted over the telephone, almost by remote control. We need not go into these details. Instead, we use a general definition of markets.

A market is a shorthand expression for the process by which households’ decisions about consumption of alternative goods, firms’ decisions about what and how to produce, and workers’ decisions about how much and for whom to work are all reconciled by adjustment of prices.

Prices of goods, and of resources, such as labour, machinery and land, adjust to ensure that scarce resources are used to produce these goods and services that society demands.

There is a narrower definition of the market.

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