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Chapter 1: Problem 2

What are the three economic questions that every society must answer? Briefly discuss the differences in the way centrally planned, market, and mixed economies answer these questions.

Short Answer

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The three basic economic questions every society must answer are: What to produce? How to produce? For whom to produce? In a centrally planned economy, the government decides on these matters. In a market economy, individual businesses and consumers (i.e., the market) determine the answers. In a mixed economy, both the government and market forces shape the answers to these questions.

Step by step solution

01

Identify the Three Basic Economic Questions

Every society has to answer three basic economic questions due to resource scarcity. These are: 1) What to produce? 2) How to produce? 3) For whom to produce?
02

Determine How These Questions are Answered in a Centrally Planned Economy

In a centrally planned economy, these questions are answered by the central government. The government makes all decisions about the production and distribution of goods and services. They decide what is produced, how it's produced, and who receives the output of the economy.
03

Determine How These Questions are Answered in a Market Economy

In a market economy, these questions are answered by individual businesses and consumers. Market forces, such as supply and demand, determine what is produced, how it's produced, and who receives the output of the economy. There is little to no government intervention in economic matters in a pure market system.
04

Determine How These Questions are Answered in a Mixed Economy

In a mixed economy, these questions are answered by a combination of government decisions and market forces. The government might make certain decisions about what is produced, especially relating to public goods and services, and how it's produced, often with regulations to protect workers and the environment. The distribution of goods and services might be influenced by both market forces and government policies.

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