Answering the Three Economic Questions

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Answering the Three Economic Questions

The Three Economic Questions What goods and services should be produced?

How should these goods and services be produced?

Who consumes these goods and services?

1. What goods and services should be produced? Each society must decide what to produce in order to satisfy its needs and wants. In todays modern society, it is often difficult to distinguish between needs and wants. It is obvious that we need food, shelter, clothing, etc. But how much of our resources should we devote to education, national defense, or consumer goods? Which consumer goods should we then produce?

Each production decision that a society makes comes at an opportunity cost.

2. How should goods and services be produced?

Should we produce electricity using oil, solar power, or nuclear power? Should teachers have classes of 20 or 50 students? Should we produce food on large corporate farms or on small family farms.

Although there are countless ways to create all of the things we want and need, all require land, labor, and capital. These factors can be combined in different ways. Refer to figure 2..1.

Before the introduction of modern farming equipment, more people and tools would be needed to produce less wheat than what fewer workers would with modern machinery. It is more economical to use modern machinery as it produces more bushels of wheat at a faster rate.

3. Who Consumes Goods & Services? In recent years, the top 25 goods manufacturers in the US launch 13 new products each day. Retail stores 50 years ago had an average of 3000 products, The average retail store now has 30 000 different products.

American farms produce 315 million tons of wheat, rice, and corn and maintain about 180 million head of livestock. Despite these quantities, the resources are not unlimited. Where do these go? Who gets the fancy car, and who affords a subway pass? Who eats well, and who eats hot-dogs everyday? Who gets a good education? Societies must decide how to distribute the available goods and services.

Factor Payments are the income people receive for supplying factors of production- land, labor, capital, or entrepreneurship. Landowners receive rent, workers receive wages, and those who lend money to build factories or buy machinery receive payments called interest. Entrepreneurs earn profits if their enterprises succeed.

How much should we pay the owners of the factors of production? How do we decide how much teachers should earn or what the interest rate should be? The question of who gets to consume what goods and services lies at the heart of the differences between economic systems today. Each society answers the question of distribution based on it unique combination of social values and goals.