Definition of Economics

To what extent do specialisation and the division of labour address the basic economic problem?

1. The basic economic problem illustrates the difficulty caused by the fact that economic goods are limited and subject to resource constraints but wants are unlimited. A choice therefore must be made, which gives rise to opportunity cost. Specialisation seeks to lower costs and thereby improve productivity by increasing the quantity and quality of output from firms. It does this by concentrating individuals or economic enterprises (or occasionally whole economies) on particular parts of the production or supply chain. This is often accompanied by the division of labour, in which individual workers or small teams of workers focus on particular aspects of the production process for a good or service. If correctly carried out, specialisation increases output and efficiency, leading to gains in terms of welfare and pareto efficiency for societies (shown by the outward movement of a production possibility curve.) It can also lead to lower costs, and possibly to production ...

Inequality, Part One: the greatest market failure?

Income inequality arises when different consumers have different incomes, and different people have different talents. It could also arise because of the source of income or the value of the talents. For instance, employees might have different incomes from each other because of different marginal labour products, different factor returns to their labour, or different elasticities of labour. People might have different skills for which there is a greater or lesser need and employers, or the purchasers of labour might have different demands. Equally, entrepreneurs often take greater risks than others, and thereby expect and receive greater rewards than those who do not take risks. There might be different factor returns to capital or land, which result in various levels of profit, dividend, or rent, for those who do not live by the return to their labour value. A functional market would bring all these diverse groups together as suppliers and consumers and would matc...

Is the existence of different wages a problem for societies, and if so, how can it be remedied?

Adam Smith, and Karl Marx, both believed that labour value lies at the heart of all economic value. Commodities, goods, and services arise from the interaction of land, labour, and capital. Since Land is fixed until new land is cleared or built by workers, and since capital enhances labour and is invented by people, they both thought that the only people who added value in economic transactions were workers. This theory of labour value was qualified in the second half of the twentieth century by the elevation of entrepreneurialism as a factor of production. The enterprising businesspeople who took on risks, brought factors together, and who were rewarded with profit having been prepared to make losses, were elevated to a ‘fourth factor.’ This idea makes some sense, but also serves to undermine the idea that labour value on its own creates economic value. If labour has value, some argue that the value of time taken from a life to work should be viewed equally. This means t...

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