Define the following concepts and state why they are important in the study of e

Question

Define the following concepts and state why they are important in the study of economics: 1. Opportunity Cost and comparative advantage 2. The role of Adam Smith’s concept of the ” invisible hand” in a Market Economy 3. Market failure 4. The market system is a good way to organize economic activities and answers the fundamental economic questions of what to produce? How to produce and who gets what? In recent time some economists have questioned whether the American system is equitably addressing the issue of who gets what considering that “CEOs of the largest U.S. firms earn an average of $15 million per year-nearly 300 times more than typical workers” (Brill, 2018) Briefly define an economic system; a market system; and whether there is a problem of equity in the United States.

Explanation / Answer

Question 1. Opportunity cost is the value of the good or service that is forgone. In other words, it is the value of the next best alternative to the one that is chosen.

Comparitive advantage: In simple terms, comparitive advantage is the advantage one firm, individual and/or nation enjoys in comparison to another firm, individual and/or nation in producing a good or service. For example the US has a comparitive advantage in producing defence equipments as compared to any country in the gulf region. This is because the countries in the gulf region are better off producing oil as they have vast resources of it and it costs them less to produce it. The gulf regions have a comparitive advantage in producing oil over the US.

Question 2. The invisible hand is a metaphor for free market interactions.

Question 3. When the goods and services produced do not reach the target groups or there is a mismatch in the allocation of resources, there is lack of social welfare. The market system is said to have failed if this situation occurs.

Question 4. An economic system is characterized by the way in which the goods are produced and takes into account the allocation of resources and distribution of goods and services among the various groups of consumers in a region or nation.

A market system is a platform which allows for interaction of buyers and sellers of various goods and services. This system is based upon rules and regulations framed by the regulators of the market. Players in a market system make deals by quotations, negotiations or bargains, and settlements.

Problem of equity in the US:-

Yes, there is a problem of equity in the US. Any system that functions purely or largely on the basis of a free market system, which is largely based the interaction of market forces will face a problem of equitable distribution of resources. This is based on the simple fact that it is competition and not generosity that is the primary driving force of such a system. There are several reports indicating that 40% of the wealth of the US is in the hands of 1% of the wealthiest in the country, while the 80% of people are in the bottom of the list with just 7% of the country's wealth.

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