This paper explains the benefits to the UK (United Kingdom) economy of exchanges arising from the price mechanism, arising from specialisation, that addresses the central problem of economics.
First and foremost, the central problem of economics, according to Lord Lionel Robbins of the London School of Economics, is
basically about humans having unlimited wants, but because of limited resources
of the factors of production of land, labour, capital, and entrepreneurship, people cannot have everything that they want. This
is the situation of scarcity necessitating rational choice, given finite
resources on earth to meet unlimited wants.
There are a few keywords and core concepts that
we need to address before we start on our essay. Exchanges refer to the
movement of goods and services in exchange for money, in a free market economy.
Specialisation refers to the division of labour that occurs in a free market
economy that uses the price mechanism. Specialisation means that individuals or
firms produce one good, and can thus reap economies of scale from it, where
economies of scale refer to falling long run average costs (LRAC) a the scale
of output increases. The central problem of economics can basically be addressed
through the price mechanism in a free market economy, which refers to the intersection
of demand and supply, where, as Adam Smith famously said, prices act as an “invisible
hand” coordinating the factors of production to allocate goods in the economy, solving
the problems of "what" to produce, "how" to produce, and "for whom" to produce those very goods. This paper now explains the benefits to the UK economy of exchanges arising from specialisation.
First and foremost, the price mechanism and the concomitant specialisation that arises from it lead to efficiency
in the UK market. There are many kinds of efficiency, but according to economic theory
the price mechanism in a competitive market would be productive and allocative efficient, ceteris paribus.
Productive efficiency means that the market produces at the lowest possible average
price, while allocative efficiency means that the market produces also where P
= MC, where MC means marginal costs. Alternatively, allocative efficiency can
also be defined as where the market allocation is the socially optimal level for
society, under conditions of no market failure. For example, if UK farmers specialised in the production of various crops and then exchanged to get what they need for their daily needs, then the agricultural produce market would achieve productive and
allocative efficiency, because UK farmers would produce at the bottom of their LRAC and thus achieve
the Minimum Efficient Scale (MES), the lowest point of the LRAC. This would ultimately benefit UK consumers because of lower prices and greater output, the greatest benefits of productive and allocative efficiency.
At the same time, beyond microeconomics, this question also asks about
the UK economy. For the larger economy, specialisation would lead to an economy
that could exchange goods internationally. International trade is defined as
the exchange of goods and services across international boundaries. If the UK
specialises, for example, in the production of capital intensive goods, such as cars and technological products, and then trades with another country, say China which specialises in the production of labour
intensive goods, such as clothing, then trade can take place, which could increase UK’s actual growth, as AD = C + I + G + (X-M). This is basically the benefit of specialisation and exchange on the international stage, called comparative advantage, where one country specialises and produces a good it has a lower opportunity cost of producing, and then exchanges it for a good in which it has a comparative disadvantage in, which leads to a higher consumption possibilities.
In conclusion, it can be argued that exchange and specialisation to
solve the central problem of economics can benefit the UK economy in terms of
promoting productive, allocative efficiencies, as well as international trade because of comparative advantage for the benefit of the UK's economic growth.
JC Economics Essays - This excellent economics essay, written under examination conditions, was kindly contributed by S. S., who achieved an grade A for H2 Economics at the A level examinations and also a Merit for H3 Economics. He achieved a university place at the London School of Economics and received good recommendations and testimonials from his economics and civics tutors. Special thanks for the kind and useful contribution. What can we learn about writing good economics essays from this sharing? Thank you for reading, and cheers.
