The Basic Economic Problem

As we have said, the central problem of economics is to determine the most efficient ways to allocate resources. This means that decisions must be made about how the factors of production will be used to produce the goods and services people need and want. To accomplish this, every society must answer the following three questions:

• What goods and services are to be produced, and in what quantities?

• How are those goods and services to be produced?

• Who will receive and consume (get to use) those goods and services?

What Goods and Services Are to Be Produced and in What Quantities? Individuals and societies can obtain things by producing them themselves, by exchanging things that they already own for them, or by receiving them as gifts. Since a society cannot have everything, it must decide which goods and ser­vices it wants now and which ones it is willing to postpone having or to give up completely. For, exam­ple, some people believe that the United States should be more self sufficient, relying less on goods and services from other countries. They feel that American businesses should put more resources into producing basic commodities such as steel, ships, automobiles, and textiles rather than buying them overseas.

Sometimes deciding what to produce can be quite difficult. For example, today, there are many nations, known as less-developed countries (LDCs), that barely have enough resources to feed and clothe their people. For such societies to raise their living standards, production must increase beyond present levels. But when available human resources and capital resources are fully employed, how can pro­duction be increased?

One way to increase production in the future is to modernize. This usually means obtaining more effi­cient machinery, improving communications and transportation systems, and providing training and education for the labor force. Shifting resources from farming, for example, to highway construction can be very risky, especially if it results in lower food production. For a nation with widespread poverty, even a slight reduction in the food supply can trigger famine. International agencies, such as the World Bank, and generous nations can and do provide aid to many LDCs. This economic support is helping these LDCs to modernize, increase production, and fed their people—but most LDCs continue to need support and assistance.

How Are Those Goods and Services to Be Pro­duced? There is more than one way to build a home or a school, manufacture an automobile, or farm land. Will the school have many stories or one floor? Will the automobile assembly line use robots? How much farmland will be used for corn and how much for wheat?

Except the school building, which in most instances would be a government project, all these questions would be answered in the United States by private individuals. In other parts of the world, however, how to manufacture an automobile might be a government decision. As for farming practices, some societies let the government decide, others follow time-honored traditions, while still others let the farmers decide.

Who Will Get to Use the Goods and Services Produced by the Economy? Since there will not be enough produced to satisfy everybody's wants, some way must be found to decide how the output will be divided. For example, who will get to ride in limousines, who will have to use public transporta­tion, and who will have to walk?

Societies answer these questions in many ways. In some countries the nobility or royalty receive a large share of the nation's output. In other countries mem­bership in a particular political party has been the key to wealth. Here in the United States, the market system and ownership of resources usually deter­mines who will be rich, middle class, or poor.