Economy and Society relationship tagged along with each other for a long time.
In the Previous Blog, we learn about the fundamentals of economics and what the economy means. The next thing we need to know, how does it functions and the parameters affecting the functioning of the economy?
One of the most crucial functions of a good economy is the effective allocation of scarce resources. How does it do that? Many factors are responsible. Let’s start with money, something that everyone is interested in, especially in today’s world where “cash is the King.”
Role of money in Economy and Society Relationship
I had always wondered how can a printable paper hold such importance in our society. I mean it should be printed infinitely if it solves the problem like poverty, hunger, and malnutrition.
To understand these, let’s begin right from the beginning. We know humans have made quite a development starting from Apes. But back then, when we all had just started to make improvements like discovering innovations in making fire, weapons, agriculture, and so on.
In today’s world, it is not considered a significant achievement. It built the rock-solid foundation of the complex civilization we are today. Back then, when someone wanted something from some other individual, it would lead straight to fight. But then, as agriculture came into existence, they started to exchange things with each other.
This system was named the barter system, in which if you want to cut your hair, you will go to the barber, ask him to cut your hair, and give him 2kg rice or some other resource you have.
Issues with the Exchange system
The exchange system had many problems, like what if the barber does not want rice if he has already received a large amount of rice from other customers. How to decide the cost of a haircut in terms of different things? If someone brings wheat to exchange, how much wheat will he have to give, making the allocation of resources very difficult?
So to solve the problem, we invented money, a common agreed thing excepted by everyone rather than using a feeble exchange system. Now, suppose the barber wants to buy wheat. In that case, he can take the money from the customer to buy it from the market. If the customer has rice and wants to get his haircut done he can earn money by selling the rice in the market and get a haircut.
So money is just an Entity made by humans to make the economics smoother. It is common ground among all humans and analogous to the goods and services in the market.
Types of economic system
Economic systems are mainly classified into 3 types according to how they are operated. They are:
1] Command economics system: In this system, the central body has control over everything. In the communist system, the government tells to where and when to make a hydroelectric power plant. The government tells what, when, and how much to grow on agricultural land.
2] Market economic system: in this system, there is no central body. It is wholly run freely by the individual in the society. If you have land, you can grow whatever crop to give you a reasonable price in the market. The government cannot command you on what to do.
3] Mixed economics system: this system basically combines both command and market economic systems. Basic, essential things are controlled by the government rest are left to the people of the system.
Role of prices
Money undoubtedly aids in allocating resources, but prices play a prominent role in it. Prices help in allocation, improving the efficiency of utilization of the resources, which are the main functions of an economy. Different economies try to perform these functions in different ways. In the feudal system (command type system), the lord of manor tells where to grow wheat, barley, and rice, how much to grow, etc.
It is much like the modern communist system, where complexity is higher. The central body coordinates tell where, when to build a hydroelectric plant, etc. It is a market type, a free-market economy coordinated by prices and not by a central body. You can put the pants you are wearing now for sale and set the price you feel right.
The buyer can buy it from you if they think the price is right or ask you to lower the price or not buy it if they do not feel right. Everyone is making their individual transactions with another individual by mutually agreeing on a particular value. It might seem impossible how such a system where the central system is absent can function efficiently and stay away from chaos. The reason behind it is prices travel faster than fire on petrol.
Economics and the Quality of Life
Everyone is struggling to improve their life quality, so they always want the best for them. When someone in japan makes high-quality shoes, we can see people buying them all over the world. Suppose someone else makes an improvement in production efficiency and makes the same quality of shoes at a lower price. In that case, the whole world starts to buy that shoe from that person or company. Though an individual purchases the shoe, the prices travel worldwide like news, and everyone responds to it.
This is how prices attract things from all over the world. It increases competition and which in turn increases the efficiency of the use of scarce resources. Prices do this thing for millions of product, whereas in a command system, just imagine the number of people the central body has to recruit to manage even a few products, and if we look into history, even while managing few products command type economies have not been able to do it efficiently
Prices are Beneficial to all
A mobile company makes 2 types of smartphones, each having a different combination of features. If one phone does not make sales well, the company will not spend money and resouces on creating that phone and removing the unsold smartphones at a lower price.
In the same way, if many users though don’t understand the technicality of the phone, they can look at the prices and understand the end result of the phones. Later, they can select the one that gives features that suit their needs. Prices make life more manageable. Countries in Europe have an abundance of food because of a lack of agriculture, so they are willing to pay a higher price than others.
So, a farmer in an agricultural country does not know that there is a lack of agriculture in Europe. He just knows that the prices are high and he will send his products to Europe. It benefits both as Europe gets what they need and is essential to them and the farmers get the excellent price they need. So, prices are like Prophets. They inform everyone around the world what’s important to them.
Conclusion
The high prices at a place inform us that it has a scarcity of that thing, and low prices mean it has an abundance of that particular thing. In the same way, if a manufacturer is making a loss on the specific product. It tells them not to waste their resources on that thing as there is no demand for that particular thing. It helps the consumer to understand the end result without knowing the technical details. You can take any such example. It’s the prices that maintain the equilibrium around the world where the free-market economy is allowed to function.
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