Basic Economics: Part 2
Updated: Mar 7, 2021
All economies need a form of leadership, but how do we determine who or what leads it? A nation decides how its economy is structured by asking the 3 key questions of economics. In this article, we will be breaking down the 3 questions and learning about economic systems.
The 3 Key Questions
The 3 questions consist of the following: what goods and services are produced, how should goods and services be produced, and who consumes goods and services. In short, these questions are asking how does society manage scarcity.
When we ask what goods and services are produced, we are asking how much of our limited resources should be put into public services or consumer goods. Society needs to make choices because of scarcity. A representation of this question is the guns versus butter model. The model is a Production Possibility Curve (PPC) that represents a debate on whether more guns or butter should be made.
By asking how should goods and services should be produced, we are asking how should society utilize the 4 factors of production to produce goods and services. For instance, would an automated factory be better than a manually operated factory? Essentially, we are trying to figure out the most efficient way to produce goods and services.
When we ask who consumes goods and services, we are asking who is allowed to receive goods and services. This questions also asks how society distributes income and factor payments, or payments to those who provide the 4 factors of production. How will the kind of work determine the amount of income received by workers?
An economic system is a system that manages production, resource allocation, and the distribution of goods and services. It is basically created to answer the 3 key questions. There are three main economic systems: market, command, and mixed.
A market economy is an economy that is controlled by buyers, and based off of markets. It is often associated with capitalism. Markets are any situation where buyers and sellers meet to exchange goods or services. Market economies are a free market, and are not regulated by the government. Instead markets are regulated by a combination of competition and self-interest, referred to as the "invisible hand". The "invisible hand" works since buyers and consumers always want the cheapest price, so suppliers compete with each other over the quality and price of goods. Some modern market economies include Hong Kong and Singapore.
A command economy is an economy that is controlled by the government, and is often associated with communism. The government answers the 3 economic questions. The price of goods and services are also determined by the government, and not an invisible hand. There is no ownership or property rights, and everything is owned by the government. Some modern command economies include Cuba and North Korea.
A mixed economy is an economy that combines aspects of both a market and command economy. There is a free market and some government intervention to ensure the balance of the economy. This means that ownership is allowed, but there are government regulations. Most economies in the world are mixed economies. Some modern mixed economies include the United States, Canada, and China.
In summary, nations form their economic structure by asking the 3 key questions of economics. Whichever the system is, all economic systems aim to manage scarcity.
This wraps up our basic economics series. Please subscribe and follow us on instagram. Thank you for reading, see you in the next post!