The Basic Economic Questions: What? How? For whom? Read the text below and do the tasks that follow.

Given the problem of scarcity, no nation has sufficient productive resources to produce all the goods and services its people want.

Productive resources can be divided into natural resources, capital goods, labour, and entrepreneurship. All of them are very important, as no economy would be effective without one of them. Let us look at the example of Sarah Shape.

Suppose that Sarah inherited some money from her grandmother, is looking for a business opportunity. Sarah hears about an old tile factory, which is up for sale, and wonders if it might be used for the manufacturing of bricks. She knows that clay can be used for the production of bricks and has also found out that that there are no brick factories nearby. Given the situation, Sarah thinks she can earn a profit by producing bricks in a place where there is clay but no factories. She decides to convert the old tile factory into a brick factory, and soon the unemployed workers have new jobs. The entrepreneurship provided by Sarah has resulted in the combining of the other factors of production – the clay, the old tile factory, and the unemployed workers – to start a new production unit. This example shows that these four production factors are closely related.

Each nation has only a limited supply of natural resources, capital goods, labour, and entrepreneurship. Thus, a nation can produce only so many new factories, houses, automobiles, refrigerators, TV shows, books, movies, and hamburgers in a given year. As a result, the nation must make difficult choices.

There are three basic economic questions that every nation must consider when making these choices. They are (1) What goods and services shall be produced? (2) How shall they be produced? and (3) For whom shall they be produced? Let us briefly examine each of theses questions.

Within every nation, people must have some method of deciding what combination of goods and services they should produce with their limited resources. For example, they must decide what portion of total production will be devoted to capital goods and what portion will be devoted to consumer goods. Once this decision is made, it is necessary to decide what kinds of consumer and capital goods will be produced. For example, will the production of consumer goods be restricted to the basic necessities, or will luxury goods, such as stereos and cameras, be produced as well? If luxury goods are to be produced, what kind and how many of each will be produced?

Once the question of what to produce is answered, it is necessary to decide what production methods are to be used. For example, food can be produced by a large number of workers using simple and inexpensive tools, or by a small number of workers using complex and expensive machinery. The same is true of the production of most items you use every day.

Because no nation can produce enough goods and services to satisfy everybody’s wants, it is necessary for people to have a method of deciding who gets the goods and services produced. Should everybody get an equal share or should some people get more goods and services than others? If some people are to get more, how much more should they receive? This second question is perhaps the most difficult question of all because it involves the issue of fairness; and different people have different ideas about what is fair.