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Section 1 Answering the Three Economic Questions

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Objectives

After studying this section you will be able to:

1. Identify the three key economic questions of what to produce, how to produce, and who consumes what is produced.
2. Analyze the societal values that determine how a country answers the three economic questions.
3. Explain the characteristics of traditional, command, and market economies and describe the societal values that influence them.

Section Focus

All societies must answer three key economic questions about the production and consumption of goods and services. How a society answers these questions depends on how much it values different economic goals. Four different economic systems have developed in response to these three questions.

Key Terms

• economic system
• factor payments
• patriotism
• safety net
• standard of living
• traditional economy
• market economy
• centrally planned economy
• command economy
• mixed economy

In Chapter 1, you read about the economic concept of scarcity—that we cannot have all that we want or need. Indeed, in some places in the world, people cannot even meet their basic needs for food, clothing, and shelter because their resources are too scarce. Scarcity forces societies and nations to answer some hard economic questions. Different economic systems have evolved in response to the problem of scarcity. An economic system is the method used by a society to produce and distribute goods and services. Which economic system a society employs depends on that society's goals and values.

Three Key Economic Questions

Because economic resources are limited, every society must answer three key economic questions:

• What goods and services should be produced?
• How should these goods and services be produced?
• Who consumes these goods and services?

What Goods and Services Should Be Produced?

Each society must decide what to produce in order to satisfy its needs and wants. In today's complex societies, it is often difficult to distinguish between needs and wants. While it may be obvious that we need food and shelter, modern societies face additional important considerations. How much of our resources should we devote to national defense, education, public health and welfare, or consumer goods? Which consumer goods should we produce?

Recall the guns-and-butter trade-off described in Chapter 1. Because of our limited resources, each production decision that a society makes comes at an opportunity cost.

How Should Goods and Services Be Produced?

The next question we face is how to use our resources to produce goods and services. For example, should we produce electricity with oil, solar power, or nuclear power? Should teachers have classes of 20 students or 50 students? Should we produce food on large corporate farms or on small family farms?

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