STARTER

What is the basic economic problem?

What other key concepts do you remember?

 Explain!
3 BASIC ECONOMIC QUESTIONS Friday, August 13, 2021
AND ECONOMIC SYSTEMS
THE THREE BASIC ECONOMIC
QUESTIONS AND RESOURCE
ALLOCATION AND DISTRIBUTION
Aims
Identify and explain the three basic economic questions
Distinguish between the role of markets and government intervention in designing
and proposing solutions to the basic economic questions
Distinguish between economic systems: the free market economy, planned economy
and mixed economy
THE THREE BASIC
QUESTIONS OF THE
ECONOMIC PROBLEM
There are three separate aspects to the economic problem

What is to be produced?
How is production to be organized?
For whom is production to take place?

The questions what? and how? are related to resource allocation, whereas whom? is
related to the distribution of
WHAT IS TO BE PRODUCED?
The economy must choose the what type of goods to produce and
in what quantities

Resources need to be allocated to this production

HOW IS PRODUCTION TO BE
ORGANIZED?
Decisions must be made as to where production will take place

Decisions must be made whether to automate production or be

labor intensive

Decisions must be made as to what inputs to use in production

FOR WHOM IS
PRODUCTION TO TAKE
PLACE?
The benefits of production must be allocated, how should goods produced be
distributed among the economy

Decisions must be made as to where these benefits are allocated

Should output be allocated by government, first come first served or via the price
mechanism
DISCUSSION
Think if you would start a business…
What would you produce?
 How much? What resources would you need?
How will you produce it?
 Where? Automated factory, labor intensive?
For whom are you producing?
 Who are your customers? How will your products reach them?
ECONOMIC SYSTEMS
There are three distinct economic systems namely:

Command
Market
Mixed
COMMAND ECONOMY
The government plans all economic activity and allocates
resources in an economy
Characterized by
 Inefficiency
 No/Little choice
 Beneficial for society
 Equality
 No competition
COMMAND ECONOMY
WHAT: decided by central planners/committees, representing the
state. Targets specific work units

HOW: Specified by central planners. May vary according to a

political agenda – not necessarily the cheapest method (e.g. if low
unemployment is a goal, the government may want to use a labor
intensive [more expensive] method)

FOR WHOM: production is for the benefit of all and the greater
good
MARKET ECONOMY
The laws of supply and demand (free market) allocate the
resources
Economy is characterized by
 Efficient
 Private ownership
 Competition
 Decentralized Decision Making
 Quality and innovation
 Consumer Sovereignty
 Profit motive
MARKET ECONOMY
WHAT: customers cast their “dollar vote” (produce what people will pay for)

HOW: producers use the lowest cost (cheapest) method. Though many economies
are becoming more and more conscious of the environmental effects of industry

FOR WHOM: those willing and able to pay. The level of income is determined by
the value of the resources we have to sell
MIXED
Both the government and the free market allocate the resources
The part of the economy organized by the government is known as
the ‘public sector’
The part of the economy organized by firms is known as the
‘private sector’
The private sector may not always produce the ‘best mix’ of goods
and government intervention may be required
ECONOMIC SYSTEMS

Bahamas Argentina Denmark China Cuba North Korea

Singapore Mauritius France
Nepal Italy
Paraguay Sweden
UK
Many developed economies
TRANSITIONAL ECONOMIES
The term transitional economy is used when an economy is moving from a command
economy to a free market system

For example, since the 1980s the Chinese economy has been reallocating resources
from the public sector to a growing private sector.

This change from a planned economy to a free-market economy is an example of a

transitional economy.

What advantages and disadvantages have existed in your country as a result of this
transition?
DRAWING
Time to demonstrate you know some of the basics!

Draw out and explain each of the concepts on your sheets.