Given that we have relative scarcity it gives rise to three basic economic questions faced by every economy. What to produce, how to produce it and for whom it should be produced.
What to produce?
This is concerned with how we allocate our scarce resources. Should we produce bananas or oranges? Capital goods (e.g. factory equipment) or Consumption goods? Petrol powered cars or solar powered cars? Military weapons or better hospitals? Coal fired electricity or solar electricity? The list of possible options or trade-offs are virtually endless, and the selection of goods or services to produce necessarily requires us to determine the volume or quantity to produce.
How to produce?
Again, this is an allocation question and asks what combination of scarce resources will we use to produce those goods and services that we have decided to produce. For example, do we use more labour than capital (labour intensive production methods)? More capital than labour (capital intensive production methods)?
For whom to produce?
This is really concerned with how the goods and services are allocated or distributed to society. If left to free markets (i.e. markets without government intervention), those with greater economic power (e.g. the wealthy) will have greater access to goods and services and some members of society (e.g. the poor) will be unable to purchase some essential goods or services (e.g. health care).
The overriding consideration for governments around the world when answering the above questions is ‘which economic system will ultimately maximise welfare and living standards of its citizens’?
In Australia, we primarily have a market based economy, where the market effectively determines the way most resources are allocated in the economy via the price mechanism (also referred to as the market mechanism). Some countries believe that the market should be given a lesser role and that decisions about what, how and for whom should be made by a central authority or a government.
Countries around the world will have economic systems that lie somewhere in between one that is totally determined by market forces (market capitalism) and one that is determined by a central authority (planned socialism).
Course notes quick navigation
1 Introductory concepts 2 Market mechanism 3 Elasticities 4 Market structures 5 Market failures 6 Macro economic activity/eco growth 7 Inflation 8 Employment & unemployment 9 External Stability 10 Income distribution 11.Factors affecting economy 12 Fiscal/Budgetary policy 13 Monetary Policy 14 Aggregate Supply Policies 15 The Policy Mix