How Are Those Goods and Services to be produced?

Date: 2015-10-07; view: 402.

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Whenever people gather in a community, they necessarily deal with a few universal economic problems. These fundamental questions are as crucial today as they were at the dawn of human civilization. Every human society - whether it is an advanced industrial nation, a centrally planned economy, or an isolated tribal society – must face and solve three fundamental and interdependent economic questions.

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

· How are these goods and services to be produced?

· Who will receive and consume these goods and services?

The first basic choice is that ofwhat goodsa society should produce and in what quantities.

Every economy has limited resources at its disposal but the goods and services wanted by its people are numerous. With the limited resources it can't produce all that is wanted by its people. So an economy faces the problem of what goods and services are to be produced and in what quantities. In other words it faces the problem of resources allocation between their alternative uses.

Should resources be allocated to the production of consumer goods or capital goods; whether to produce civilian goods or goods for defense; whether to construct luxury hotels or houses, all these are problems of choice.

In fact the choice to be made refers to what goods are to be produced and the second choice associated with it relates to the quantities of these goods. In other words what combination of goods and services should be produced? The nature of the combination of goods and services to be produced depends on the consumer choices andthe consumer's preferences* reflected in market prices or on the priority laid down in government policies.

A second basic choice is that of how to produce. Most goods can be produced in more than one way by using resources in different quantities and combinations. It is often possible to vary the factor combinationin manufacturing. Any society decides how it will organize its scarce resources in order to use them efficiently. Efficiency is a key criterion deciding how to produce. Efficiency means producing goods and services with a minimum of expense, effort, and waste. As the economy has to economize its limited resources it has to make a choice between various production methods to produce different goods.