Three central Problems of economy:

Every human society – whether it is an advanced industrial nation, a centrally planned economy, or an isolated tribal nation – must confront and resolve three fundamental economic problems. Every society must have a way of determining what commodities are produced, how these goods are made, and for whom they are produced.

Indeed, these three fundamental questions of economic organization – what, how, and for whom – are as crucial today as they were at the dawn of human civilization. Let’s look more closely at them:

  • What commodities are produced and in what quantities? A society must determine how much of each of the man possible goods and services it will make and when they will be produced. Will we produce pizzas or shirts today? A few high – quality shirts or many cheap shirts? Will we use scarce resources to produce many consumption goods (like pizza)? Or will we produce fewer consumption goods and more investment goods (like pizza – making machines), which will boost production and consumption tomorrow?
  • How are goods produced? A society must determine who will do the production, with what resources, and what production techniques they will use. Who farms and who teaches? Is electricity generated from oil, from coil, or from the sun? Will factories be run by people or robots?
  • For whom are goods produces? Who gets to eat the fruit of economic activity? Is the distribution of income and wealth fair and equitable? How is the national product divided among different households? Are many people poor and a few rich? Do high incomes go to teachers of athletes or autoworkers or venture capitalists? Will society provided consumption to the poor or must people work if they are to eat?

Based on how the above problems are addressed the economies are classified into three types.


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