Basic Economic Questions
Basic Economic Questions
All economic systems that have ever
existed or will ever exist have to
answer some basic questions. Let's
explore the questions and some
The 5 Questions
1 - What goods and services will be produced?
2 - How will the goods and services be
3 – Who will get the goods and services?
4 – How will the system accommodate
5 – How will the system promote progress?
Throughout history different countries have used different
organizing methods to answer the basic economic questions. The
command system (socialism or communism) is not as prevalent
today as in the past. We will focus on the market system.
Some of the main characteristics of a market system are
Freedom of enterprise and choice
markets and prices
Technology and capital
Specialization of resources
Use of money
Active, but limited, government
1) What will be produced?
The answer to the first question is that we let the supply and
demand of the market determine what and how much to
produce. Goods that consumers are both willing and able to
buy, and producers are willing and able to make, get made in
the amount that both working together see fit. You may be
willing and able to go to the moon, but no supplier is willing
and able to make that available at this time (although it seems
we are getting closer). But just think about all the items that
are available in the markets we have today.
Note consumers “vote” for goods to be made with their dollars
and the goods are likely to be made if firms can make profit.
The answer to the second question is producers will use the
least cost combination of inputs to produce a given level of
output. The reason for this is twofold. First, by using the least
cost methods more profit will be earned by the producer.
Producers certainly like to make profit. But, the second
reason is that if a producer does not use least cost methods of
production, when other producers do, the high cost producer
may not be able to compete with the other low cost producers
and will eventually go out of business.
Say there are three ways of making a good from a technical point
of view. Here we list the number of units of each resource
needed to make a good:
Next I show what each resource costs per unit and we can then see
how much it costs to make the units under each technique. For
now, let’s just say we look to the market to find what it costs to get
each unit of each resource. Here technique 2 would be used!
3) For Whom?
The answer to the third question is those who are willing and
able to pay for the items made. We become able to pay by
giving up something that is valuable to us - labor or other
4) How will the system
Some person who is probably now dead was the first to notice and
say, “change is the only permanent thing in this world.” In our
economy we see consumers change their buying habits and
technologies in production change.
How does the market system accommodate this change? Well, the
process goes something like this: Goods we no longer want
become less profitable and eventually we have less made (pay
phones, for example), while what we want becomes more
profitable and we have more made (cell phones). Resource
owners move their resources to place where they get the most.
The authors relate that the market system is like a huge
communication system through which prices of goods and
resources and profits from production communicate to people
where to direct resources.
What do you think should happen to the number of resources we
devote to health care given the current state of prices and resources
used in health care in the US?
This is my idea – we should put more resources into health care –
like flood the market with doctors!
5) How will the system promote
What is progress?
Let’s say, quite crudely, that you can refer to the amount of
output in our economy as the size of a big pie. You could also
consider the size of the piece of the pie you get as your standard
of living. In this sense progress usually means making a bigger
pie and having folks get a larger piece.
Does a market system allow for progress? Sure does! When you
let folks earn cash from advances they make then folks build a
better mouse trap! This happens along the lines of technological
progress and the accumulation of capital goods.
Are there problems with using a capitalist, market based
system to answer the 5 basic questions? Sure there are monopoly, public goods, and the like. Another problem might
be what to do about those who do not have the ability to
generate what it takes to consume the items needed to survive.
We should always be aware and on the look-out for potential