a) According to David S Watson scarcity means availability in amounts less than sufficient to satisfy all wants or desires. The test for scarcity is price hence only goods that are not scarce command a price.Therefore economists try to explain how this economic problem is solved by different economic systems. There are three economic systems that exist in the world today that is the free market, command and mixed economy. These economic systems have different ways in which they try to answer the fundamental economic questions of “What? How? And for whom to produce for?
Samelson and Nordhaus define a market economy as an elaborate mechanism for cording people, activities and business through the a system of price and markets. Production is mainly driven by the market forces of demand and supply, which determine price hence it is termed as the price mechanism. The USA is an example of what can be simply classified as a market economy. Thus by matching sellers and buyers in each market, the three fundamental questions of what? How?, for whom?. Consumers determine what goods and services will be produced by their dollar votes, which means their daily purchasing decisions. Firms in the market economy are profit motivated therefore they abandon areas where they are losing profits and lured by high profits into production of goods in high demand.
The question of “How” goods and services are produced is determined by the competition among different producers. Hence the best way for firms to remain competitive in the market economy, is to keeps costs at minimum by the adopting of the most cost efficient methods of production. According to Stanlake this can be achieved by specialisation, where workers specialise in a job in which one is best suited to increase productivity. Furthermore firms can produce by division for labour Furthermore firms can produce by division for