1.2 THE THREE BASIC ECONOMIC QUESTIONS: RESOURCE ALLOCATION AND OUTPUT/INPUT DISTRIBUTION
what to produce?
-has to do with the choice of which goods and services are going to be produced with the scarce resources that are available.
-For example, are we going to use all the available land to grow crops or is some of it going to be used to build a factory to
produce shoes? Is all the labour going to be dedicated to the production of baked goods or are some labourers going to work
on the construction of new houses? These questions illustrate the dilemma of deciding what to produce with the resources we
have.
how to produce?
-has to do with the combination of resources and production methods that will be used to produce each of the chosen goods
and services.
-For example, if we decide to produce crops, what combination of factors of production and what technology should we use to
produce them? Are we going to do intensive agriculture, using fertilisers and high-end sower and harvester machines (more
capital per field of land) and only few workers, or are we going to use extensive agriculture methods and grow crops in a
more traditional way using less capital and more workers to plough, plant and harvest?
for whom to produce?
-has to do with the distribution of the goods and services that the society is going to produce. Because of scarcity, not
everyone's wants can be satisfied. Who is going to get to consume the goods and services produced?
-For example, which goods are going to be consumed only by those who can pay for them? Which ones are going to be
provided by the government so that everybody can have access to basic necessities or merit goods like education and
healthcare? Should everybody receive an equal share of the goods and services produced?
Resource allocation
Allocation of resources is the apportionment of productive assets among different uses. Resource allocation arises as an issue
because the resources of a society are in limited supply, whereas human wants are usually unlimited, and because any given
resource can have many alternative uses.
Distribution of income
The distribution of income refers to the pattern of income across the spread of the population.
Re-distribution of income
Redistribution of income and wealth is the transfer of income and wealth (including physical property) from some individuals to
others through a social mechanism such as taxation, welfare, public services, land reform, monetary policies, confiscation, etc.
MARKET VS. GOVERNMENT INTERVENTION
Market economy
In the market method, resources are owned by private individuals or groups of individuals, and it is mainly consumers and firms
who make the economic decisions by responding to prices that are determined in the market.
Command economy
In the command method, resources are owned by the government, which makes economic decisions by commands. In practice,
commands involve legislation and regulations by the government, or in general any kind of government that affects decision
making
In real world, there has never been an economy that is entirely a market economy or command economy. Real world economies
combine the markets and commands in many different ways, and each country is unique in the ways they combine them.
ECONOMIC SYSTEMS: FREE MARKET ECONOMY, PLANNED ECONOMY AND MIXED ECONOMY
Economic systems
Economic systems are ways in which societies allocate the relatively scarce resources and distribute the goods and services that
are produced with them. They are a way of rationing those resources, goods and services, and are therefore also called rationing
systems.
Rationing
The function of the price mechanism where the economic question of ‘for whom’ is determined
Free market economy
Centrally planned economy/
command economy
Mixed economy
