The three basic economic questions are:
What to produce: The very first question that an economy needs to answer is what goods are to be produced. Human wants are unlimited but the resources required to fulfill the wants are scarce. So the resources should be allocated carefully to meet the wants so that the most important and essential wants are can be met first and then the less important ones follow.
How to produce: There are a number of ways to produce any good. The study of economics also deals with the processes to be followed in the production. That is the choice of technique. The choice of technique depends on the availability and the relative abundance of the resources. If a country has enough labor but lacks in capital then that economy can follow labor intensive production techniques.
For whom to produce: This question is concerned with the distribution of the good produced in the economy. The distribution should be such that it fulfills the necessities of the people in all sections of the society. Distribution should be welfare maximizing in nature.
We have discussed the three basic questions of economics. Now let us see how different economic systems answer these questions. We discuss three types of economic systems, command and control or socialistic, the price system that is followed in a capitalistic economy and the mixed economic system.
The command and control system or the socialistic economy: In a command and control system the central authority that is the government decides which goods are to be produced in the economy and in what quantity. The allocation of resources for the production of the goods is done accordingly. The government also decides on the choice of technique that is the question of how to produce. Finally, the distribution of the produced good is also the task of the government. In such an economic system there is a central planning authority that assesses the resource availability in the economy and the necessities of the society. The planning authority decides on the questions of what to produce, how to produce, how to produce and for whom to produce. All productive resources are owned by the government.
The Price system or the capitalistic economy: In a price system that is followed in a capitalistic economy allows the market system to arrive at the solution to the three basic questions of the economy. The interaction of demand and supply helps the economy to meet its needs. Goods are produced according to the market needs. So in this case the answers are automatically answered by the free market economy. The price is determined by the interplay of demand and supply forces. The price itself is a mechanism of distribution in the economy. All the productive resources are owned by private entities.
The mixed Economic system: In this type of economy there is a central planning authority that decids on the allocation of resources but there is free market mechanism as well We can find the government ownership of resources as well as private ownership. This is a mixture of socialistic and capitalistic economy.
References
Seth, T. (2016, January 15). Fundamental Problems of an Economy. Retrieved from Economics Discussion: http://www.economicsdiscussion.net/economic-problems/fundamental-problems-of-an-economy/1441
