Question

LESSON SUMMAR Circular Flow Diagram HOUSEHOLDS FACTORS INCOMES SPENDING GOODS CABPET KEANING FIRMS OStudy.com

1. Each of these is what we call a “maximizing agent”, which means that each of them strives to maximize something. What is it that each maximizes?
2. The system aims to accomplish a specific end, namely efficient allocation of resources. What does this mean? How does this system accomplish its goal? How does the satisfaction of needs & wants fit into this economic system and its goal?

Answer 1

a) firms are trying to maximise the profits while households are trying to maximise their satisfaction from consumption of goods and services

b ) efficient allocation of resources means that resources are allocated in the production of various goods and services in a manner that needs of all individuals are met ensuring full utilisation of the available resources  such that at the efficient level no individual can be made better off without making someone else worse off .

satisfaction of needs and want fit into the system as individuals require money to purchase goods and services which they earn by providing their labour services to the firms for production of goods and services . Firms provide factor income to the workers in exchange for their services . The income so earned is used to purchase goods and services which fulfil the needs and wants of the individuals.