Economic problem

Economic systems as a type of social system must confront and solve the three fundamental economic problems:

  • What kinds and quantities of goods shall be produced? "...how much and which of alternative goods and services shall be produced?"
  • How shall goods be produced? "...by whom and with what resources and in what technological manner...?"
  • For whom are the goods or services produced? Who benefits? "...how is the total of national product to be distributed among different individuals and families?"

Economic systems attempt to solve these problems in several ways: "...by custom and instinct; by command and centralized control (in planned economies)" and in mixed economies using "...both market signals and government directives to allocate goods and resources." The latter is variously defined as an economic system blending elements of a market economy with elements of a planned economy, free markets with state interventionism, or private enterprise with public enterprise.

Paul Samuelson wrote in Economics, a "canonical textbook" of mainstream economic thought that "the price mechanism, working through supply and demand in competitive markets, operates to (simultaneously) answer the three fundamental problems in a mixed private enterprise system..." At competitive equilibrium, the value society places on a good is equivalent to the value of the resources given up to produce it (marginal benefit equals marginal cost). This ensures allocative efficiency — the additional value society places on another unit of the good is equal to what society must give up in resources to produce it.

The solution to these problems is important as according to Keynes in Essays of Persuasion, "...the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race—not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms."

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