The Three Basic Economic Questions

The Basic Economic Questions Because of scarcity every society or economic system must answer these three (3) basic questions:

1. What to produce? What should be produced in a world with limited resources? Examples) Using limited resources, should a local government build a new school or improve roads? Using limited resources, should a farmer grow wheat, cotton, or corn? Using limited resources, should an automobile manufacturer produce driverless cars?

2. How to produce? What resources should be used? Examples) How should we obtain oil? How much pollution should be allowed? How should we produce steel – using union or nonunion workers? Using recycled steel or iron ore?

3. Who consumes what is produced? Who acquires the product? How is it distributed? Examples) Who gets a flu vaccine? Where are new schools built? Who should clothes be produced for (what demographic group / generation)?

The goal in answering these questions is both productive and allocative efficiency. Efficiency is the goal of all economic decisions to solve the problem of scarcity. Thus, the aim of each society is to answer the above questions efficiently. There are two types of efficiency: Productive efficiency: a situation in which the economy could not produce any more of one good without sacrificing production of another good. Use all resources for lowest cost Allocative efficiency is a state of the economy in which production represents consumer preferences. Production that is valued by society: when supply meets demand We can’t have everything we want, so we have to make use of resources in the best way possible. This is the basic tenet (main idea; theme) of economics.