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This website provides a very succinct & professional outline of the three basic economic questions along with examples that effectively get the point across. This website additionally includes a look into the history of society's battle with resource allocation & means of production.

I chose this website because it gets to the point of the topic, providing additional detail such as the differing working conditions from industry to industry like goods being produced by untrained employees in privately owned factories or by experts in government laboratories. Additional options for distribution are discussed such as handing out goods & services to the poor or only selling them to the wealthy. An especially unique addition from this website is a look at human civilization's history of dealing with the three economic questions, specifically noting Greek philosophers such as Plato & Aristotle's attempts to answer these questions before they were articulated into the form of the 3 economic questions we use in modern day. Also mentioned is the beginning point of modern economic theory in the writing of Scottish philosopher Adam Smith titled An Inquiry into the Natures & Causes of the Wealth of Nations published in 1776.

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What It Means

In order to meet the needs of its people, every society must answer three basic economic questions:

What should we produce?

How should we produce it?

For whom should we produce it?

A society (or country) might decide to produce candy or cars, computers or combat boots. The goods might be produced by unskilled workers in privately owned factories or by technical experts in government-funded laboratories. Once they are made, the goods might be given out for free to the poor or sold at high prices that only the rich can afford. The possibilities are endless.

Although every society answers the three basic economic questions differently, in doing so, each confronts the same fundamental problems: resource allocation and scarcity.

Resources are all of the ingredients needed for production, including physical materials (such as land, coal, or timber), labor (workers), technology (not just computers but, in a broader sense, all the technical ability and knowledge that is necessary to produce a given commodity), and capital (the machinery and tools of production). Scarcity refers to the essential fact that people's wants or desires are always going to be greater than the resources available to fulfill those wants.

Simply put, scarcity means that resources are limited. No country can produce everything, no matter how rich its mines, how massive its forests, or how advanced its technology. Because of the constraints of scarcity, then, decisions must be made about resource allocation (that is, how best to allocate, or distribute, resources for the maximum benefit of the society).

When Did It Begin

Questions of scarcity and resource allocation are as old as human civilization. Throughout history every society-whether society is defined as a nation, a tribe, or a single family-has had to determine what to produce, how, and for whom. While indirect attempts to answer these questions can be found in the writings of the ancient Greek philosophers Plato (c. 427-c. 347 bc ) and Aristotle (384-322 bc ), the questions were not articulated in their current form until economics was introduced as a discipline of study more than a thousand years later.

Modern economic theory as we know it today is founded on the writings of the Scottish philosopher Adam Smith (1723-90), especially his best-known work, a five-book treatise called An Inquiry into the Nature and Causes of the Wealth of Nations . Ever since this groundbreaking work was published in 1776, many competing economic theories have been presented, but all of them have been organized around the attempt to answer the three basic questions.

More Detailed Information

For every society the answers to the three basic questions depend on what kind of economic system it uses. The term economic system refers to the way in which a society organizes the production and distribution of good and services. The system that a society chooses reflects the philosophical and political ideas on which that society is founded. Historically, there have been three basic types of economic system: traditional, command, and market.

Traditional Economic System:

A traditional economy is rooted in long-standing cultural customs. Resources (especially land) are allocated through inheritance or by decisions of cultural leaders, and the new generation performs the same economic roles as their parents and grandparents before them. Traditional economies are founded on a strong philosophy of social interdependence and community. They usually revolve around subsistence farming, in which food is grown to feed the members of the community, not to sell or trade in markets. Although most traditional economies have been replaced by more modern economic systems, they can still be found in the agricultural areas of developing countries in Asia, Africa, and South America.

Command Economic System:

A command economy (also called a planned economy or centrally planned economy) is one in which economic decisions are controlled by a central authority, usually the state (government). The state controls the society's capital (means of production) and decides how resources should be allocated (including what should be produced, how prices should be set, and how much people should be paid for their work). Command economies go hand in hand with socialist or communist political philosophies, which emphasize the equal distribution of wealth but do not support individual entrepreneurship or the acquisition of private property. The Soviet Union was the most prominent planned economy of the twentieth century.

Market Economic System:

A market (also called capitalist) economy is one in which answers to the three basic questions are the cumulative result of many individual decisions about what to buy and what to sell in the public marketplace. Buyers express their preference for certain goods and services, thereby influencing what is produced. The means of production are privately owned by sellers, who try to produce things as cheaply and efficiently as possible in order to make a profit (meaning that they sell an item for more than it cost to produce). In its purest form a market economy should function without any government intervention. Market economies are founded on the idea that the good of the whole society depends upon freedom of choice, competition, and the right of every individual to pursue private wealth. The United States is the largest market economy in the world.

In reality, most countries employ some mix of economic systems. For example, although the United States identifies itself as a market economy, the government controls public education, the postal service, and a number of other enterprises that are integral to the functioning of the economy. The U.S. government also imposes various business regulations that supersede market forces, such as a minimum wage that all businesses must pay their workers, emissions standards that limit pollution, and excise taxes designed to offset the negative social impact of certain goods, such as cigarettes. Implicit in such regulations is the idea that freedom to profit (in a pure, unregulated market) is not the only measure of public good. In the United States there is constant debate about how much or how little the government should intervene in the market.

Recent Trends

In the 1980s most of the world's command economies began to embrace elements of the market system. In 1985, for example, President Mikhail Gorbachev (b. 1931) introduced in the Soviet Union an economic-reform program called perestroika (the Russian word for "restructuring"). The reforms led to economic upheaval, however, and the Soviet Union collapsed in 1991. Since then Russia and other former Soviet countries have continued to gravitate toward a market economic system, but the process has been fraught with difficulties.

In the late twentieth century the country that had transitioned most successfully from a command to a market economy was China. Beginning in the late 1970s, reforms in China were carried out as the government began to relinquish its control over the means of production and allow market forces to exert an increasing influence over the three basic economic questions: what gets produced, how it gets produced, and for whom it gets produced. Despite these changes, in the early years of the twenty-first century China still described itself as a "socialist market economy."

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for whom?what it meansin order to meet the needs of its people

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every society must answer three basic economic questions:

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Three Economic Questions: What, How, For Whom?

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Three Economic Questions: What, How, For Whom?What It MeansIn order to meet the needs of its people, every society must answer three basic economic questions: Source for information on Three Economic Questions: What, How, For Whom?: Everyday Finance: Economics, Personal Money Management, and Entrepreneurship dictionary.

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This website goes in depth on a wide scope of economics related information, namely the input & output of resources as well as input & output markets.

I chose this website because it explores economics in a much more vast scope than my other resources, allowing readers to learn more about additional topics along with the three economic questions. Markets are discussed in good detail, discussing how households serve as providers of the factors of production (resources) to businesses, namely labor as workers, land & property as landlords & capital as investors, all of which businesses then use to produce goods to sell to households in a perpetual cycle. One particular topic this website covers unlike many others is planned systems. Planned systems are described thoroughly & separated into two categories: communism as practiced in North Korea & Cuba, & socialism as practiced in Sweden & France. The differences between the two are highlighted, & then further compared to free market systems, also known as capitalism.

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University of Minnesota Libraries Publishing edition, 2016. This edition adapted from a work originally produced in 2010 by a publisher who has requested that it not receive attribution.

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1.3 What Is Economics? – Exploring Business

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To appreciate how a business functions, we need to know something about the economic environment in which it operates. We begin with a definition of economics and a discussion of the resources used to produce goods and services.

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This website explores additional market types & further informs the topics discussed by my other resources. The special bonus this website houses is a circular flow diagram modelling the production & allocation of goods & services in a market-based economy.

I chose this website due largely to the additional information it provided to me concerning traditional economies, command economies & mixed economies. Traditional economies saw households producing a large amount of what they consumed, with a limited amount of exchange between households & lowered level of production due to the smaller workforce & inferior technology, resulting in a lower overall standard of living. Command economies see a central authority figure holding sole control of the means of production & making the majority of production & allocation decisions. While sometimes categorized as a communist nation, North Korea more specifically falls under the definition of a command economy. Mixed economies are the result of a mixture of two or more established economic systems. The most prominent mixed economy is China, which is neither a pure planned economy nor a pure market economy.

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In This Article

1. What Are the Three Economic Questions?

2. 5 Types of Economic Systems

3. Market Economies and the Circular Flow Diagram

4. What Is Left Out of the Circular Flow Diagram

What Are the Three Economic Questions?

Society has to grapple with three main questions in deciding how to organize the economy.

These questions are:

Each of these questions is motivated by the same underlying problem. Resources in the economy are scarce. There is not enough time, money, or goods and services to satisfy every want of every person, so somehow, society must decide how to produce and allocate goods and services using their limited resources.

5 Types of Economic Systems

Throughout history and across countries, society has answered the three economic questions in distinct ways. An economic system (or economic order) refers to a particular way societies organize their economy.

The main economic systems are:

1. Traditional Economies

Humans lived in traditional (or primitive) economies throughout much of history. In a traditional economy, households produce most of what they consume. Division of labor and market exchanges are limited in traditional economies, meaning the extent to which households exchange goods and services with people outside of their household and community is limited. The standard of living in traditional economies is low compared to many other economic systems, because of lower productivity and slower technological progress.

2. Command Economies

In a command economy, a central authority controls the means of production and makes most production and allocation decisions. Industries in a command economy are publicly owned, and private property is limited. North Korea is an example of a country with a command economy.

3. Planned Economies

A planned economy is like a command economy in that authorities such as a central government make decisions and exercise control over the production and distribution of goods and services. These authorities can allocate resources and set prices at their discretion. Planned economies differ from command economies because firms and industries may be privately owned. Private companies, however, must operate according to the plans and regulations set forth by the government. The former Soviet Union and Cuba are examples of planned economies.

4. Capitalist or Market-Based Economies

Most economies today are market-based economies. In a market-based economy, economic decisions are determined mainly by markets and left up to individual decision making by households and businesses. The key features of a market-based economy are markets, private property, and firms. A market-based economy is also sometimes called a free market economy or a laissez-faire economy.

5. Mixed Economies

A mixed economy is an economic system with elements of two or more well-established economic systems. If a country uses both markets and state planning to produce goods and services, it is a mixed economy. China, which was once a centrally planned economy, is now a mixed economy. It is neither a pure planned economy or pure market economy.

Market Economies and the Circular Flow Diagram

What Is the Circular Flow Diagram?

Circular flow diagrams, such as the one shown below, are used to model the production and allocation of goods and services in a market-based economy.

In a circular flow diagram, there are two main actors - firms and households. Firms and households interact in two types of markets: markets for goods and services and markets for factors of production.

In the market for goods and services, firms sell their products to households. Households pay for these products using money they make in factor markets.

In factor markets, businesses buy or rent factors of production such as labor and capital from households. These factors are what firms use to produce their products. In exchange for the factors of production, households receive money in the form of income.

Market-Based Economies and the Three Basic Economic Questions

Looking at the diagram, you can see how market-based economies address the three basic economic questions.

What should be produced?

Firms decide what to produce based on consumer demand in a market-based economy. If firms can't sell their products to consumers in the goods and services market, firms won't earn revenue and will not be able to stay in business.

How should it be produced?

Goods and services are produced through entrepreneurship and free enterprise. Privately owned firms produce their goods using labor, capital, and other factors of production. Firms buy, rent, or hire these inputs from households in factor markets.

For whom should it be produced?

Firms sell products to consumers who are willing to pay the price set by the market. The interaction of supply and demand in the market determines the market price.

What Is Left Out of the Circular Flow Diagram

Keep in mind that the circular flow diagram is a simplified model of market-based economies. Market-based economies use markets as the primary way of producing and allocating goods and services. Still, economic activity can occur outside of factor markets and goods and services markets. For example, household work, such as cleaning and child care, are economic activities that stay contained within the household. Such activities involve no market interactions.

Households might also exchange these services with other households. Firms might sell or buy goods, services, and factors of production with other firms. And finally, the government plays a role in market-based economies by providing citizens with public goods and services such as national defense, public education, and healthcare. Rather than orchestrating the economy as it would in a planned economy, the role of government in market-based economies is to provide a safety net and to provide the goods and services that markets are not good at allocating. Government intervention is limited, but still necessary in market economies.

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The Three Economic Questions Addressed | Outlier

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In This Article What Are the Three Economic Questions? 5 Types of Economic Systems Market Economies and the Circular Flow Diagram What Is Left Out of the Circular Flow Diagram Society has to grapple with three main questions in deciding how to organize the economy.

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This website offers an extra delve into the topic of scarcity, what it entails & what we do to circumvent it. It also covers the  additional basics of the three economic questions discussed elsewhere in this padlet.

I chose this website because it fully explored scarcity while providing additional examples & scenarios to better explain the topic in its entirety. Posing the question of wanting to grow wheat or corn but only having a limited amount of land to use, forcing the decision of which to prioritize. Labor is limited in the same way, forcing the prioritization of one industry or good at a deficit to other industries or goods. This website stresses the importance of carefully considering how to handle limited resources, urging first to ensure the goods & services being prioritized are what the society truly desires most & second to make sure those developed goods & services are being used in the most efficient manner possible. The ultimate goal for allocating goods & services is to maximize production while minimizing waste & maybe even costs too. Ultimately this scarcity is what forces societies to address the three economic questions in the first place.

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The three basic economic questions are what to produce, how to produce it, and for whom to produce it. All three are to answer how we allocate resources to meet our needs and wants. But, then, the way we answer them also depends on the economic system we adopt.

The basic problem in economics is scarcity. We face limited resources to satisfy our needs and wants, which are unlimited. This situation gives rise to scarcity, which in turn forces us to make choices and raises the three questions above. Long story short, we have to make choices to allocate resources because we face scarcity. We must use resources at their highest use to satisfy what we need and want most.

To answer the three questions above, we need an economic system. It is the way in which we organize, process, and distribute available resources to the population.

The economic system determines how we answer all three questions. For example, under a free market economy, market mechanisms - demand and supply - decide what we produce, how to produce, and how to distribute it.

In contrast, the government is ultimately in charge under a command economy. The government regulates, starting from determining what is produced and how to produce and distribute it.

Why does scarcity force us to make choices?

Resources are limited. Meanwhile, we must satisfy our unlimited needs and wants. The situation gives rise to scarcity because limited resources are not enough to satisfy unlimited ones. Therefore, we cannot have everything we want. We must choose what we want most and how to use resources efficiently to fulfill what we want most.

For example, we have land for growing wheat and corn, the two products we most desire. Unfortunately, our land area is limited. Therefore, we must choose whether to use the land to plant more wheat or corn. The more grain we produce, the less corn we get. Conversely, the more corn we want, the less wheat we get.

Like land, labor is also limited. If we deploy farm laborers to grow corn, less is available to grow wheat. The opposite holds true if we raise more wheat.

The situation is the same when we are faced with agricultural machinery. It is limited, forcing us to choose whether to use it to grow wheat or corn.

UDACITY

Since scarce resources force us to make choices, we must be careful in making them. Two things we need to consider. First, the goods and services we produce are what we most desire. Second, we use resources most efficiently. Thus, our choices - ideally - should be to maximize resources in the best way possible to produce the goods and services we most desire. That way, we can avoid wasting resources while satisfying our needs and wants.

What are the three basic economic questions?

Scarcity forces the world's economies to answer the following three questions, regardless of the economic system they adopt. These three are:

1. What to produce

2. How to produce

3. For whom to produce

These three basic economic questions will be answered through the adopted economic system.

What to produce

This question concerns what goods and services we should produce. We cannot produce all goods and services. Again, our resources are not enough to produce them all.

Answering this question requires us to answer what we need and want most. Of course, we may have different needs and wants. However, because we cannot fulfill all of these needs and wants using the available resources, we must choose which needs and wants are the most vital and must be fulfilled.

After mapping out our needs and wants, we sort them out and determine which goods and services we need to produce to satisfy them. This includes answering how much we need and what we should produce.

How to produce

How to produce is related to how we process resources to make goods and services. Answering this question requires us to think about and choose a method, technique, or technology in production. For example, we adopt labor-intensive techniques with more reliance on labor than capital. We use labor - workers' skills and knowledge - to produce goods and services.

In other cases, we might use capital-intensive techniques. We depend more on capital, such as machinery and equipment, than labor.

Which technique we adopt depends on our needs. For example, we assume capital-intensive production to produce goods on a mass scale. By relying on machines, we can produce standardized output in significant quantities. Instead, we use labor-intensive production to make unique products, capitalizing on uniqueness in human skills and knowledge.

For whom to produce

This question requires us to make choices about how we distribute goods and services among populations. Several options appear, including:

Should all goods and services be distributed to everyone?

Are goods distributed in the same amount to each individual?

Are some people able to earn more than others?

Are certain goods and services only available to some people?

Under a command economy, the government responds to these choices. For example, the government determines how much each individual receives. Whether the government will distribute it to everyone and whether everyone gets an equal share depends on the government's decision.

In contrast, under a free market economy, market mechanisms determine distribution. The market mechanism works through market supply and demand. On the demand side, for example, distribution is based on people's ability to pay. Those with higher abilities have the opportunity to get more items. Conversely, a lower ability to pay makes us earn less. Long story short, how much stuff we can get depends on how much we can buy, which in turn depends on our income.

What to read next

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Three Basic Economic Questions and Resource Allocation - Penpoin

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The three basic economic questions are what to produce, how to produce it, and for whom to produce it. All three are to answer how we allocate resources to meet our needs and wants. But, then, the way we answer them also depends on the economic system we adopt.

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This image serves as an easy to read demonstration of the cycle each society goes through when having to answer the three basic economic questions as well as the possible conclusions a society could reach as a solution. The image flows easily thanks to the layout of the information & guiding arrows making this diagram impossible to misenterpret.

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This image flatly lays out the differing methods employed by each type of economy to solve the problems presented by the three basic economic questions. Traditional economies make decisions based on long held customs & beliefs, command economies make decisions based off of the government's wants & needs, & market economies make decisions based off of the individual's wants & needs.

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What about your topic surprised you the most?

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What about your topic surprised you the most?

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I was most surprised to learn about how long civilization has been working out the answer to the three economic questions without knowing they were tackling the three economic questions, only truly being defined & categorized in the 1700's.

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What information would you pass on to a relative or friend?

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What information would you pass on to a relative or friend?

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I would prioritize giving them the knowledge of which market types exist as well as which nations make use of each one, so that if they were to travel or just do business in their own country they would have a more thorough understanding of how trade is conducted anywhere in the world.

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This video discusses the biggest balancing act of economics: the unlimited needs/wants of consumers & the limited amount of resources available to fulfill said needs/wants. Since resources are finite, they need to be properly rationed/allocated. Economies need to decide which needs & which wants to prioritize when allocating resources to consumers. The video also further explains the next step of the process which economists call the production problem, that being how to produce things with the amount of labor a society has compared to the amount of capital, as well as the best way to utilize them for the purposes of production. Finally, the distribution problem is explained, with the video saying that the third hurdle a society must face is deciding whether to produce for the wealthy who can afford it or spread goods more evenly around.

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This video discusses the idea of scarcity & its influence on what each country decides to produce & distribute. A country with poor farmland like many in the middle east would have to focus on a different industry they can profit off of such as oil & petroleum, & using that to trade with other countries to acquire the goods & services they lack. Some countries also have high amounts of hard labor at a low cost, which would also largely impact which production resources would go where. Shelly also specifically discusses free market economies where variety & competition is crucial for business & people work to earn money which they use to purchase things they then own & compares those economies to the former Soviet Union's method of distribution in the form of communism where people were not allowed to own properties or businesses, instead working to the best of their ability at the job the government had assigned to them & receiving their share of resources from the government evenly.

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This video provides more detail on the different approaches to answering the three economic questions. Some countries may invest more into social programs & agriculture while others may choose to bolster their military resources & tech industry. Mr. Sinn also introduces the topic of capital goods, consumer goods, durable & non-durable goods. Capital goods are goods that are essential for the production of other goods. Consumer goods are the final product that is purchased directly by the consumer. Durable goods are goods that can be used on a regular basis & last for three years while non-durable goods are goods that last for fewer than three years. Some products can fall into multiple categories, like an iPad being both a creative tool for businesses as well as a final product purchased by consumers, making it both a capital good as well as a consumer good.

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Types of Goods and the 3 Basic Economic Questions

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This video brings up additional topics to build upon the discussion points introduced by the other videos. There are several different ways a society can produce the same good or service, with production methods that maximize profit while simultaneously minimizing costs or production methods that maximize employment while incurring higher costs. Also discussed here is the idea that economic systems are dynamic & subject to change due to countless factors such as shifts in government along with differing amounts of government intervention into industries & production. With time, countries may even create new methods of production or even change their primary industry altogether.

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My padlet is going to go in depth on the 3 major economic questions: What is to be produced, how are these goods & services going to be produced, & who will get the goods & services?

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I & many students like me deal with an abstract version of these questions every day. Making the decisions on how to divvy up our time between one assignment & another makes the difference between a successful & unsuccessful student. While society as a whole deals in goods & services, people in my position deal much more frequently with the scarcity of our own time.