Three basic questions

Main idea: Every society has an economic system to allocate goods and services. There are  four basic types of economic systems and each one answers the three basic economic questions  differently.

   All economic systems face the same basic questions: What should be produced? How should it be produced? For whom should it be produced? Do you think it’s fair that some people have more than others, or should everyone share equally in what a society produces? Read on to learn about this and other questions that all economic systems must answer. The way a nation determines how to use its resources to satisfy its people’s needs and wants is called an economic system.Although nations have different economic systems, each one is faced with answering the same three basic questions: What goods and services should be produced? How should they be produced? Who should share in what is produced?

What Should Be Produced? As you’ve learned, we live in a world of scarcity and trade-offs. If more of one particular item is produced, then less of something else will be produced. If the government decides to use resources to build new roads, then fewer resources are availableto maintain national parks. If a city decides to hire more police officers, fewer funds are available to add teachers to classrooms. Similarly, an automobile manufacturer must decide whether to produce pickup trucks, minivans, sport utility vehicles, or luxury cars—and how much of each.

How Should It Be Produced? After deciding what to produce, an economic system must then decide how those goods and services will be produced. How many laborers will be hired? Will skilled laborers or unskilled laborers do the work? Will capital goods be used to manufacture the products, thereby reducing the number of laborers needed? What kinds of technology will be used in the production process? For each good and service produced, there are always trade-offs possible among the available factors of production. Decisions must be made as to what the best combination of available inputs will be to get the job done for the lowest possible cost.

For Whom Should It Be Produced? After goods or services are produced, the type of economic system under which people live determines how the goods and services will be distributedamong its members. Who receives the new cars? Who benefits from a new city school? Who lives in new apartment buildings? As you will read, the answers to these economic questions vary greatly depending on where you live. In the United States and in many other countries, most goods and services are distributed to individuals and businesses through a price system. Other economies may distribute products through majority rule, through a lottery, on a first-come-first-served basis, by sharing equally, by military force, and in a variety of other ways.

Types of economic systems Economists have identified four types of economic systems. They differ from one another based on how they answer the three basic questions of what, how, and for whom to produce. The four general types of economic systems are traditional, command (or controlled), market (or capitalist), and mixed. Keep in mind that these four systems   are theoretical representations of economies found throughout the world. No “pure” systems really exist—they are all mixed economies to some degree.

A pure traditional economyanswers the three basic questions according to  tradition. In such a system, things are done “the way they have always been done.”

Economic decisions are based on customs and beliefs—often religious—handed down from generation to generation.

The pure command economyis somewhat similar to the traditional economy in that the individual has little, if any, influence over how the basic economic  questions are answered. However, in a command or controlled system, government leaders—not tradition—control the factors of production and, therefore, make all decisions about their use.

In a market system, economic decisions are made not by government, but by

individuals looking out for their own and their families’ best interests. A limited government makes it possible for individuals to decide for themselves the answers to the three basic questions. Individuals own the factors of production, and therefore choose what to produce and how to produce it. Individuals also choose what to buy with the income received from selling their labor and other resources. All of these choices are guided not by tradition or a central planning agency, but by

information in the form of market prices.

A mixed economy combines basic elements of a pure market economy and a command economy. Most countries of the world have a mixed economy in which private ownership of property and individual decision making are combined with government intervention and regulations.

Unit  4