Question

1. Explain the three fundamental economic questions of What, How and for whom, stating clearly the considerations that determine each question by answering:

a. What goods and services will be produced?

b. How will the goods and services be produced?

c. Who will get the goods and services produced?

Answer 1

a. What goods and services will be produced?

The economy has to decide what type of goods or services to produce. For example the economy has to decide whether it should produce food and essential commodities or should it produce automobiles and computers. The economy has to decide on what it has to produce taking into consideration the condition of the society. If the economy is underdeveloped, it needs to produce food and basic necessities whereas an highly developed economy can afford to produce luxurious items.

b. How will the goods and services be produced?

After deciding on what to produce, the economy has to next decide how the decided good will be produced. Should it use labor intensive technology or capital intensive technology. If the country is labor abundant use labor intensive technology whereas capital abundant countries will decide to use capital intensive technology for producing goods and services.

c. Who will get the goods and services produced?

After deciding on what to produce and how to produce, the economy has to decide to whom it will distribute its goods and services. Should the goods be made available at low prices so that everyone can afford or should it be charged high prices, so that only the rich can afford. If the country has large number of poor people it need to make goods available at low prices so that they can also afford it.

All these questions confronts the same fundamental problems: resource allocation and scarcity. In a free market economy all the above three will be determined by market mechanism or price mechanism. Under a centrally planned economy all the three decisions will be taken by a central authority. In the case of mixed economy, the market forces and central authority together tries to answer these questions, if market fails the government will intervene.