Economic Systems
Each point along the economy’s production possibilities frontier is an efficient combination of outputs. Whether the economy produces efficiently and how the economy selectsthe most preferred combination depends on the decision-making rules employed. But regardless of how decisions are made, each economy must answer three fundamental questions.
Each point along the economy’s production possibilities frontier is an efficient combination of outputs. Whether the economy produces efficiently and how the economy selectsthe most preferred combination depends on the decision-making rules employed. But regardless of how decisions are made, each economy must answer three fundamental questions.
Three Questions Every Economic System
Must Answer
What goods and services are to be produced? How are they to be produced? And for whom are they to be produced? An economic system is the set of mechanisms and institutions that resolve the what, how, and for whom questions. Some criteria used to distinguish among economic systems are (1) who owns the resources, (2) what decisionmaking process is used to allocate resources and products, and (3) what types of incentives guide economic decision makers.
What Goods and Services Are to Be Produced?
Most of us take for granted the incredible number of choices that go into deciding what gets produced everything from which new kitchen appliances are introduced, which roads get built, to which of the 10,000 movie scripts purchased by U.S. studios each year get to be among the 500 or so movies made.Although different economies resolve these and millions of other questions using different decision-making rules and mechanisms, all economies must somehow make such choices.
How Are Goods and Services to Be Produced?
The economic system must determine how output gets produced. Which resources should be used, and how should they be combined to make stuff? How much labor should be used and at what skill levels? What kinds of machines should be used? What new technology should be incorporated into the latest video games? Should the office complex be built in the city or closer to the interstate highway? Millions of individual decisions determine which resources are employed and how these resources are combined.
For Whom Are Goods and Services to Be Produced?
Who will actually consume the goods and services produced? The economic system must determine how to allocate the fruits of production among the population. Should everyone receive equal shares? Should the weak and the sick get more? Should it be “first come, first served,” so that those willing to wait in line get more? Should goods be allocated according to height? Weight? Religion? Age? Gender? Race? Looks? Strength? Political connections? Lottery? Majority rule? The value of resources supplied? The question “For whom are goods and services to be produced?” is often referred to as the distribution question.
Although the three economic questions were discussed separately, they are closely related. The answer to one depends on the answers to the others. For example, an economy that distributes goods and services uniformly to everyone will, no doubt, answer the what-will-be-produced question differently than an economy that somehow allows more personal choice. As we have seen, laws about resource ownership and the role of government determine the “rules of the game”—the set of conditions that shape individual incentives and constraints. Along a spectrum ranging from the freest to the most regimented types of economic systems, pure capitalism would be at one end and the pure command system at the other.
What goods and services are to be produced? How are they to be produced? And for whom are they to be produced? An economic system is the set of mechanisms and institutions that resolve the what, how, and for whom questions. Some criteria used to distinguish among economic systems are (1) who owns the resources, (2) what decisionmaking process is used to allocate resources and products, and (3) what types of incentives guide economic decision makers.
What Goods and Services Are to Be Produced?
Most of us take for granted the incredible number of choices that go into deciding what gets produced everything from which new kitchen appliances are introduced, which roads get built, to which of the 10,000 movie scripts purchased by U.S. studios each year get to be among the 500 or so movies made.Although different economies resolve these and millions of other questions using different decision-making rules and mechanisms, all economies must somehow make such choices.
How Are Goods and Services to Be Produced?
The economic system must determine how output gets produced. Which resources should be used, and how should they be combined to make stuff? How much labor should be used and at what skill levels? What kinds of machines should be used? What new technology should be incorporated into the latest video games? Should the office complex be built in the city or closer to the interstate highway? Millions of individual decisions determine which resources are employed and how these resources are combined.
For Whom Are Goods and Services to Be Produced?
Who will actually consume the goods and services produced? The economic system must determine how to allocate the fruits of production among the population. Should everyone receive equal shares? Should the weak and the sick get more? Should it be “first come, first served,” so that those willing to wait in line get more? Should goods be allocated according to height? Weight? Religion? Age? Gender? Race? Looks? Strength? Political connections? Lottery? Majority rule? The value of resources supplied? The question “For whom are goods and services to be produced?” is often referred to as the distribution question.
Although the three economic questions were discussed separately, they are closely related. The answer to one depends on the answers to the others. For example, an economy that distributes goods and services uniformly to everyone will, no doubt, answer the what-will-be-produced question differently than an economy that somehow allows more personal choice. As we have seen, laws about resource ownership and the role of government determine the “rules of the game”—the set of conditions that shape individual incentives and constraints. Along a spectrum ranging from the freest to the most regimented types of economic systems, pure capitalism would be at one end and the pure command system at the other.
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