The resources of production are always limited in relation to the various limitless needs of society. The limiter of labor as a resource is the total number of the able-bodied population of each country. The quantity of means of production is limited by the productive capacity of the economy in a particular period of time. As for land and minerals, today there is very little undeveloped land left suitable for agricultural production. Large-scale use of minerals has led to a severe depletion of their deposits in many regions of the planet.
It should be noted that although resources are objectively limited, this does not prevent economic theory from distinguishing between their “absolute” and “relative” limitations. By absolute limitation they mean (under-organization of production) the insufficiency of production resources to simultaneously meet all the needs of all members of society, but if these resources are sufficient to meet some selected, certain needs, then this will be a relative limited resource.
So, when we try to meet all needs at the same time, we encounter absolute resource constraints – but if we narrow down the steepness of needs, then resource constraints become relative, because for a limited steepness, resource needs are relatively sufficient. Thus, the absolute scarcity of resources is transformed into a relative one by the choice of needs to be met.
If resource constraints were absolute, there would be no choice. If there were no limited resources, the choice would be unnecessary. Choice becomes necessary in an environment of relatively limited resources. This is why economic theory studies the use of relatively limited resources. They are called “economic resources”.
The problem of choice is endless. Between what is the choice? Between economic (the best ratio of result and cost) options for the use of resources. After all, each resource can be applied to meet different needs. The technology of its use may also be different. To find the best (“optimal”) option for the use of resources from all possible – this is the meaning of the choice as an economic problem. Economic theory is the theory of choosing the optimal economic solution.
The question arises – what is considered the best choice? In the most general form, we already know the answer: the best option will be the one that provides the maximum result with a minimum of costs (whatever is the “result” and “costs”).
Since there are only three subjects in the economy: consumers (in a market economy – “buyers”), producers (“sellers”) and society (“government”), it is generally accepted that for buyers the optimal economic result is an increase in the quantity and quality of the needs satisfied, for sellers – an increase in profits, for the government – the degree of satisfaction of social needs (environmental protection, support for the disabled, benefits for the unemployed and poor, economic growth, etc.).
Choosing one or another solution, each of these economic entities solves many issues. The buyer must somehow rank his needs, highlight the priority, measure his estimated expenses with the expected income. The seller must solve no less complex issues: what exactly to produce, in what quantity and with what quality, from the production of which goods and services to refuse, what technology to apply, to calculate the amount of expected profit and its ratio to costs. There is something for the government to think about.
The economic aspect of the choice problem is to find out: which use of limited resources will provide the maximum profitability?
Economics has managed to develop a model that represents choice as an economic problem. This model became known as the “production capability graph”.
To illustrate, we will use the digital example of P. Samuelson.
Let’s say you need to produce two products – guns and oil. These goods are usually used to illustrate the alternativeness of the problem of civil and military production. For example, absolutely all the resources of society are directed to the production of oil. We will consider its volume at 5 million kg – this is the maximum that can be produced at the real level of resource and technological support. An alternative to the “oil paradise” is cannon production at the same resource and technological maximum, which can be, for example, 15 thousand pieces.
However, if society reduces the volume of oil production, it will be able to have guns. Moreover, the volumes of oil and gun production are not only alternative, but also complementary, taking into account the limited resources as a whole. The values of alternative possibilities are given in Table. 4.1.
Table 4.1.
Alternative possibilities for the production of oil and guns
Possibilities | Gun thousand pcs. | Oil million kg |
And | 15 | 0 |
B | 14 | 1 |
In | 12 | 2 |
G | 9 | 3 |
D | 5 | 4 |
E | 0 | 5 |
An illustration of this statement is presented in the graph of production capabilities (Fig. 4.4.), where the amount of oil is marked horizontally and the number of guns is marked vertically. Fixing the numbers
tables on the graph and connecting them, we get a curve of production capabilities, or transformations.
The economic meaning of transformation is that the full-employment economy is always alternative, i.e. it must choose between civil and military production by redistributing resources.
The transformation curve shows the values of alternatives for society. With the absolute use of resources, i.e. in a full-time economy, all points of possible combinations of gun and oil production are on the transformation curve. In the variant of incomplete capacity utilization or unemployment, various combinations of oil and gun production are not on the curve, but for example, at point U. This point shows that with the use of additional resources, it is possible to increase both civilian and military production.
A society that is at the considered (illustrated by the curve) maximum level of productive capacity, due to the lack of necessary resources, is not able to simultaneously increase military and civilian production and move to point S.
But is it even possible to move from a lower to a higher level of the production capability curve? Yes, this transition can be carried out as a result of technical discoveries, the development of new mineral deposits, scientific breakthroughs in various fields of human activity.
Society must always choose between accumulation (capital investment) and consumption. If at some time we abandon the expansion of the current consumption of various goods and services (meaning personal, not production consumption) and increase the size of accumulation (the construction of new plants and factories), then in a few years we can move to a higher transformation curve.
Using the production capability curve (Fig. 4.4.) it is possible (taking into account the clarity) to formulate once again the thesis on the alternative production of various types of commodity groups in the economy of full employment. The form of the graph shows a kind of “price” of one commodity group, expressed in an alternative amount of goods of another commodity group.
In other words, we express the price of each additional unit of oil in the number of guns, the production of which must be abandoned. For example, in order to produce oil in the amount of 1 million kg, it is necessary to abandon the production of 1 thousand guns (reduce their production from 15 to 14 thousand). To increase oil production from 1 to 2 million kg, it is necessary to abandon already 2 thousand guns (14 thousand – 12 thousand). Finally, the last increase in oil production (from 4 to 5 million kg) will require the abandonment of 5,000 guns (5,000 to 0). Thus, for every additional million kilograms of oil, society must pay an increasing “price” in the form of unproduced cannons. The same pattern applies in the case of a transition from oil production to an increasing number of guns (switching from civilian to military production). But in this case, the expression of the law of increasing costs takes the following form: the rejection of every million kilograms of oil will be expressed in an ever-smaller increase in the production of guns. So, at first, the rejection of 1 million kg of oil (from 5 to 4 million) was expressed in a large “jump” in the production of guns (from 0 to 5 thousand pieces). Consequently, such an increase in the deployment of military production cost society relatively cheaply. However, the subsequent reduction in oil production (from 4 to 3 million; from 3 to 2 million, etc.) will be expressed in an ever-smaller increase in military production (from 5 to 9 – 4 thousand; from 9 to 12 – 3 thousand, etc.). This means that society is paying an increasingly high price for the transition from civilian to military production.
The essence of the economic law of increasing costs is that with an increase in the volume of the commodity group of the same name, an increase in costs per unit of goods expressed in another commodity group is inevitable.
Thus, an economy that makes full use of available resources can increase the production of any good only by abandoning another. The functioning of the economy at the edge of production capabilities testifies to its efficiency.
The problem of choice in economics is the formulation and solution of the following questions; “What to produce?”, “How to produce?”, “For whom to produce?”. The first question is designed to decide which of the possible goods and services should be produced in a certain period of time. An individual can provide himself with the necessary goods in various ways: to produce them independently, to exchange them for other goods, to receive them as a gift. Society as a whole cannot immediately get everything: it must decide what it would like to have now, what it can wait for, and what to give up altogether.
The second question shows under what combination of production resources, using what technology, goods and services selected from possible options should be produced.
And finally, the third question comes down to who will receive the goods and services produced, pay for them, while benefiting from them.
Because needs are limitless and resources are limited, society is not able to meet all needs. It is necessary to decide which goods and services should be produced, and which in certain conditions should be abandoned. This problem has always existed and is unlikely to disappear in the foreseeable future.
Product as a result of production: individual and social product
The result of production, and therefore the interaction of its factors, is a product – this is a useful thing, object or service that is able to satisfy a certain need.
In Western literature, the term “good” is often used instead of the term “product”. Goods are means suitable for satisfying needs. Goods are defined both as desirable things that satisfy human needs and as the means we have to meet our needs. However, the property of an object that allows you to satisfy a certain need does not make it a good. The ability of an object to satisfy a need must be recognized by a person.
A distinction is made between non-economic (free) and economic goods. The former are not the subject of people’s productive activities and are not exchanged for other goods. They are usually available in quantities exceeding the need for them. These, for example, include air, in some cases – water, although without them a person cannot exist. Goods, the number of which is limited in comparison with the need for them, are called economic (this term belongs to the subjectivist school; the representative is the famous Italian economist A. Pesenti). These include those goods that are the object or result of economic activity. Related to the economic good is the problem of scarcity of goods, which leads to appropriate human behaviour in resource-limited settings.
Manifold goods, useful things, services are classified into the following main groups:
by functional purpose (consumer or industrial); by the nature of the satisfaction of needs (vital necessity, interchangeable, complementary); by time of use factor (single use, short-term, long-term); by the degree of replenishability (reproducible, rare, non-reproducible). In addition, goods are divided into tangible and intangible. Material goods include: natural gifts of nature, land, water, air and climate; products of agriculture, extractive industry; buildings, machines, tools; debt obligations; shares of public and private companies.
Intangible goods are divided into two groups:
1) inner goods are contained in the person himself and represent the qualities and abilities that motivate people to action and pleasure; for example, business ability, professional skill or the ability to derive satisfaction from reading and music;
2) external goods – find expression in business relations, protection, reputation.
Direct and indirect benefits are distinguished. The first include goods designed to directly satisfy the needs of people, i.e. consumer goods. The second is the goods used to produce other goods, i.e. the means of production.
A product, a good is also considered a service – an expedient human activity, the result of which has a useful effect that satisfies any human needs. The service differs from material goods in that it combines the processes of production and consumption. In most cases, interchangeability, accumulation, storage, transportation of services are impossible.
There are personal (satisfying the needs of each person in obtaining education, treatment, cultural and consumer services) and specific services that meet collective or special needs (management, defense, science, protection of public order).
Depending on the nature of the production process, they talk about the services of publicly organized services and the services of private individuals.
According to the spheres of application of labor, services spent in material production and services spent in intangible production are distinguished.
The statistics are based on the following structure of services:
household services (repair and individual sewing of shoes, clothes); repair and maintenance of transport; dry cleaning and dyeing; laundry, bath and hairdressing services, rental services, etc.; communication services; cultural services, services for the maintenance of children in preschool institutions, tourist and excursion services; health and education services; legal and savings bank services; services of institutions of physical culture and sports. The role of services is constantly increasing. In the United States, about 73% of the workforce is employed in the service sector, in Germany – 41%, in Italy – 35%. Today, the service sector is the most dynamic area of human activity. The development of the service sector contributes to improving the level and quality of life.
The result of the production of a separate enterprise is an individual, single product: bread, fabrics, machine tools, cars, etc. The most common indicator of production at the microeconomic level is the gross output of the enterprise, firm. This is the totality of all material goods and services created by the employees of the enterprise for a certain period of time. Gross output consists of two parts: material costs and net product. The latter represents newly created value. The pure product is divided into the necessary product and the surplus product.
The result of all social production is the social product, which is the sum of all use values created in society over a certain period of time. According to its natural-material form, the social product is divided into the means of production (capital goods) and consumer goods (consumer goods).
Each product is characterized by two properties: the ability to satisfy a particular need and the ability to embody the cost of labor. Therefore, a distinction is made between the material and social aspects of the good (Fig. 4.5.).
The natural-material side of the product is a set of mechanical, chemical, physical and other useful properties, thanks to which the product is able to meet the needs, i.e. make it a use value. There is a huge variety of consumers. costs, which is explained by the huge number of people’s needs. Currently, about 25 million types of products are known, and their number continues to grow rapidly. Use value or good is also services.
The social side of the product is that any product embodies a certain amount of labor spent on its production. In the labor process, the live labor of a particular employee is used. In those means of production that he uses, as well as in technology, information, past labor is embodied. Therefore, it is said that the production of any product consumes living and previously embodied or past labor.
In the conditions of commodity production, the social product has a value form. That’s the public side of it. In terms of value, a social product includes:
the cost of the means of production consumed; a necessary product aimed at the reproduction of the labor force; a surplus product that acts as a surplus over the necessary product.