Factors of production and circular flow of income Coursework - 2

Factors of production and circular flow of income - Coursework Example According to Samuelson (2010) the central concern of economics is solving three vital problems: what to produce, how to produce and for whom and the solution lies in making choices between inputs and outputs. The aim of this paper is thus to discuss the factors of production and the circular flow of income. To achieve this, the paper will be divided into various sections. The first section will be discussion on what economics is and the problems it seeks to address. It will also cover the importance of economics and brief explanation of different economies such as the market, command and mixed economy as mechanisms of allocating scarce resources. The second section will address the factors of production: land, labour, capital and enterprise. It will discuss their functions, qualities and how their productivity can be improved. The third section will discuss the circular flow of income which shows flow of inputs and outputs between firms and households or at microeconomics level. Last ly, a brief summary of the main points will be given. What is economics and why study economics? Samuelson (2010: 4) defines economics as â€Å"the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals.† It aims at producing the highest combination of quality and quantity of goods and services thus enhancing efficiency. Efficiency according to Samuelson is achieved when no individual’s economic welfare can be improved unless someone else is made worse off (p. 5). When efficiency is achieved the welfare of the whole society is improved. Many people might think that it is not essential to study economics but it has a lot of benefits. According to Lipsey and Chrystal (2011) economics is important in helping to understand the world in which we live and to become astute participants in the economy. It helps us to understand business cycles in relation to credit, unemployment and policies put in pla ce to deal with such crises. It also helps people to understand international trade and the effects of globalisation especially in modern era where production has gone global. Government policies to promote economic growth, use of resources, full employment and price stabilisation are also the product of economic analysis. Economics takes a scientific approach to analysis of issues in the economy and also applies econometrics to economic problems. It is based on the principle of holding other things constant when analysing variables (Gitman and McDaniel, 2008). Economics is divided into two categories: micro and macroeconomics. Microeconomics deals with markets, firms and households while macroeconomics deals with the whole economy but we shall concentrate on microeconomics. Human wants are numerous or unlimited and as stated earlier, resources are scarce. As such, it is difficult to satisfy the unlimited wants thus choices have to be made that would lead to efficient allocation of resources. For example, if a firm decides to produce household items, it foregoes the opportunity or alternative of producing industrial items or any other product. The benefits the firm could have gotten by dealing with industrial items (the next best alternative) are what Samuelson (2010) calls opportunity cost. Economics is all about making choices on what to produce, how to produce and for whom given technology and scarce resources (Wessels, 2006). Whatever choice is