What are the different ways that a society can answer the questions of what, how, and fur whom’ Different societies are organized through alternative economic system, and economics studies the various mechanisms that a society can use to allocate its scarce resources.

We generally distinguish two fundamentally different ways of organizing an economy. At one extreme, government makes most economic decisions, with those on top of the hierarchy giving economic commands to those further down the ladder. At the other extreme, decisions are made in markets, where individuals or enterprises voluntarily agree to exchange goods and services, usually through payments of money. Let’s briefly examine each of-these two forms of economic organization.

In the United States and most democratic countries, most economic questions are solved by the market. Hence their economic systems are called market economies. A market economy is one iii which individuals and private firms make the major decisions about production and consumption. A l)’Stem of prices, of markets, of profits and losses, of incentives and rewards determines what, how, and for whom. Firms produce the commodities that yield the highest profits (the what) by the techniques of production that are least costly (the how). Consumption is determined by individuals’ decisions about how to spend the wages and property incomes generated by their labor and property ownership (the fur whom). The extreme case of a market economy, in which the government keeps its hands off economic decisions,is called laissez-fair economy.

By contrast, a command economy is one in which the government makes all important decisions about production and distribution. In a command economy.such as the one which operated in the Soviet Union during most of the twentieth century. the government owns most of the means of production (land and capital); it also owns and directs the operations
of enterprises in most industries; it is.the employer of most workers and tells them how to do their jobs;and it decides how the output of the society is to be divided among different goods and services. In short, in a command economy. the government answers the major economic questions through its ownership of resources and its power to enforce decisions.

No contemporary society falls completely Into either of these polar categories. Rather, all societies are mixed economies, with elements of market and command. There has never been a 100 percent market economy (although. nineteenth-century England came close).

Today most decisions in the United States are made in the marketplace. But the government plan important role in overseeing the functioning 0 the market; governments pass laws that regulate economic life, produce educational and police services and control pollution. Most societies today operate mixed economies.

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense; a theft from those who hunger and are not fed.

President Dwight D. Eisenhower

Each economy has a stock of limited resources labor.technical knowledge, factories and tools, In deciding what and how things should be produced, the economy is in reality deciding how to

allocate its resources among the thousands of different possible commodities’ and services. How .much land will go into growing wheat? Or into housing the population? How many factories will produce computers?

How many will make pizzas? How many children will grow up to play professional sports or to be professional economists or to program computers? Faced with the undeniable fact that goods are scarce relative to wants, an economy must decide how
to cope with limited resources. It must choose among different potential bundles of goods (the what), select from different techniques ‘of production (the how), and decide in the end who will consume the goods (the for whom).


To answer these three questions, every society must make choices about the economy’s inputs and outputs. Inputs are commodities or services that are used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs. Outputs are the various useful goods or services that result from the production process
and are either consumed or employed in further production. Consider the “production” of pizza. We say that the eggs, flour, heat, pizza oven, and chefs skilled labor are the inputs. The tasty pizza is the output.In education, the inputs are the time of the faculty, the laboratories and classrooms, the textbooks,and so on, while the outputs are informed, productive,
and well-paid citizens.

Another term for inputs is factors of production.These can be classified into three broad categories:land, labor, and capital.

• Land-or, more generally, natural resources represents the gift of nature to our productive processes. It consists of the land used for farming or for underpinning houses, factories, and roads; the energy resources that fuel our cars and heat our homes; and the nonenerb’Y resources like copper and iron ore and sand. In today’s congested world, we must broaden the scope of natural resources to include our environmental resources, such as clean air and drinkable water.

• Labor consists of the human time spent in production- working in automobile factories, tilling the land, teaching school, or baking pizzas.Thousands of occupations and tasks, at all skill levels, are performed by labor. It is at once the most familiar and the most crucial input for an advanced industrial economy.

• Capital resources form the durable goods of an economy, produced in order to produce yet other goods. Capital goods include machines, roads, computers, hammers, trucks, steel mills, automobiles, washing machines, and buildings.As we will see later, the accumulation of specialized capital goods is essential to the task of economic development.

Restating the three economic problems in terms of inputs and outputs, a society must decide (1) what outputs to produce, and in what quantity; ~2) how to produce them-that is, by what techniques inputs should be combined to produce the desired outputs; and (3) for whom the outputs should be produced and distributed.

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