Every economy must answer 3 basic questions: what to produce, how to produce and for whom goods and services are produced. All societies need to make decisions about the perfect combination of factors or factors required for product generation. For example, exactly how much land, labor and capital is needed to produce consumer goods such as desktops and cars.
this Basic economic issues The reason for this is that modern society faces the problem of scarce demand, and the requirements are unlimited, but resources are scarce. Since society does not have enough resources to make every item that everyone wants, society must decide which resources to use in the production of goods or services. Does society produce running sneakers from real leather or artificial leather? Should it build a vehicle with the help of robots or manual labor?
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What technologies should be used to produce? Technology means that the correct proportion of various production factors should be applied. There are two technologies. Labor-intensive technologies will utilize relatively high labor and less capital. In contrast, a capital-intensive approach means more capital and less labor.
The choice of technology depends on the price of production factors. That is, if labor is cheap and capital is expensive, a labor-intensive approach will be considered, and vice versa. The costs of labor and capital are based on the demand and supply of labor and capital, respectively.
For example, Kidstoy Company is organizing new plush playmaking production. Corporate decision makers are considering two options, a computerized, high-tech manufacturing center handled by some professional software engineers or low-tech manufacturing plants, using countless semi-technical workers and very few equipment.
Kidstoy can achieve equal production through any option. That being said, because labor pays relatively high wages compared to equipment spending, Kidstoy chose high-tech manufacturing over low-tech.
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How does this prove resource allocation and how to produce? question. The higher labor costs prompted Kidstoy Company to create plush toys with relatively more machines and relatively less labor. But why is the cost more? It is likely to be higher, because labor alternatives are more valuable. The final idea is to adopt more affordable resources (equipment) to make manufacturing more efficient and lead to higher prices.
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