One of the prime tasks of economics is to resolve the ‘problem of choice’. The problem of choice arises because individuals have a myriad of wants they need to satisfy but the resources required to satisfy these wants are limited.
The innumerable wants cannot, therefore, be all satisfied within the constraint of available resources.
The concept of scarcity relates to the limited nature of resources available to satisfy human wants. However, the fact that something is limited does not necessarily mean that is scarce. The amount of old army boots available in our societies is very limited indeed but this does not mean old army boots are scarce! Scarcity has the attribute of want.
People must want a particular item for the satisfaction of their needs for it to qualify as being scarce. So old worn-out army boots are not scarce because no one wants them.
Goods provide the link between scarce resources and the fulfilment of unlimited wants. Goods in this respect do not only refer to physical goods like cars, skirts or artificial hair.
Goods refer to a host of non-physical goods like the oratory ones of a storyteller, the wriggling waist of a traditional dancer or the awe-inspiring structure of a heavy-weight wrestler.
Goods should be seen as services that provide the satisfaction of wants. The major characteristic of goods is that they are derived from scarce resources and are meant to satisfy wants. The question of which goods and consequently which resources are to be used is dependent on the choice people make. Generally, people will choose those goods that provide the greatest satisfaction of their wants from a given amount of resources. The available resources are ranked according to their ability to satisfy the objectives or wants of the individual.
Among these many wants some are given priority over others and considering the limited availability of resources and time to satisfy them some are chosen over others.
Therefore, the market mechanics drew two major conclusions relating to the role of the market. Firstly, the market mechanism resolves the issue of how society distributes scarce resources.
Scarce resources are efficiently distributed by the price mechanism. The price mechanism is set up by consumers willing to buy and producers willing to sell. Through the market, therefore, resources are directed to areas where they are most wanted. The basis of this operation is satisfaction maximisation by consumers and profit maximization by producers.
What can developing countries learn from this?
Developing countries are faced with the complex problem of how to distribute scarce resources amount to the many developmental needs. The proponents of the market argue that the task of distributing scarce resources can efficiently be performed by the market. Free markets will distribute resources in favour of more profitable areas.
Since producers seek profit maximisation they would invest the recourses in the most profitable opportunities. The important point is that the market mechanism through demand and supply would signal profitable ventures to entrepreneurs. If the market is controlled; the signals that may emerge will not reflect the most profitable and efficient opportunities for investment of scarce resources. If developing countries are to allocate resources efficiently, they should leave this task to the market.
Secondly, the market mechanism ensures that both consumers and producers maximise their utility. If all individuals maximise their utility it follows that society as a whole is maximising its utility. This is because society is simply composed of individuals.
The conclusion that can be drawn from here is that if the market allows individual producers to seek to maximise income it thus follows that society itself will maximiSe its income or development. The market, therefore, not only distributes resources efficiently but also ensures maximum growth.
Private benefits may be injurious to the benefit of society or may be wasteful of society’s limited resources. Take for instance a private individual who through the market mechanism discovers that there is a high demand for Chicago Bulls caps at a local ‘exclusive fee-paying school for the children of the elite. Our private ‘entrepreneur’ then borrows money from the bank to import these caps. As far as the individual is concerned he is maximizing private benefits from importing caps.
The question is whether his private maximisation is equal to society’s maximisation. Suppose after the entrepreneur has borrowed money from the bank a peasant farmer arrives at the same bank to borrow for farming inputs. The farmer is told that the bank cannot give him a loan because of the money borrowed by the cap importer. Surely as far as society is concerned the private maximisation of the importer is wasteful.
Perfect competition provides some useful insights into the behaviour of firms. However, the assumptions of the theory are severely restricted.
Monopolistic competition market structure is closer to reality than perfect competition. In monopolistic competition, there is an existence of a large number of firms but their product is differentiated.
Differentiated products serve the same purpose but have variations in physical attributes and to a certain extent even the service derived from them. A good example is washing detergents. There is a large number of firms producing washing detergents but all carry different brand names though they serve the same purpose. The differentiated nature of the products allows individual firms to retain some of their customers even after a rise in prices.
In monopolistic competition therefore the individual firm retains some command of the price at which it sells its output. The power to change its price is however restricted such that higher than market prices will lead to a decline in demand and consequently the revenue of the firm.
As Namibia is a small open economy AFCFTA provides an expanded market for its goods and services. It builds on the progress achieved through Namibian participation in regional integration initiatives, mainly SADC and SACU, as key stepping stones to continental economic integration. AFCFTA can be an important platform for Namibia’s economic diversification, export expansion and competitiveness towards sustainable growth, creation of sustainable jobs and reduction of poverty.
*Reverend Jan A Scholtz is the former chairperson of the //Kharas Regional Council.