Economic Questions

Topics: Deng Xiaoping, People's Republic of China, Mao Zedong Pages: 9 (2799 words) Published: November 27, 2012
What are the THREE (3) basic economic questions that all economies must answer? Describe the differences in the way capitalism and socialism answer these questions.

Scarcity, Choices, Opportunity Costs
We live in a finite world. No matter how seemingly bountiful the quantity of our natural resources may be or how carefully human try to conserve them, if we keep using them, they eventually are going to run out. Our tastes for goods and services are virtually limitless and this creates scarcity. Like the Rolling Stones song says, "You can’t always get what you want." Because we can’t have it all, we’re forced to make choices. When we making a particular decision, we forsake opportunity to choose the alternative option. Briefly, opportunity cost analysis is an important part of decision making process. All economies must decide WHAT to produce, How to produce and FOR WHOM to produce with its limited resources. These are the three basic economic questions that every society must consider when making choices. 1) What goods and services will be produced? -

2) How will they be produced?
3) For whom will they be produced?
Economic system refers to the way in which the society solves the basic economic problems of scarcity of resources. Different economic systems have addressed the three basic questions in radically different ways. [Samuelson 2005, pg.7]

In a capitalist system, economic questions are answered by buyers and sellers at mutually agreeable terms. Capitalism refers to an economic system based on a free market, open competition and profit motive in which property is owned by either private individuals or corporation. Capitalism encourages private investment and business, compared to a government-controlled economy. In a capitalist economic system most productive assets are held by private owners, and most decisions regarding production and consumption is made by the use of ‘price mechanism’ in the market rather than government fix. Most prices are determined by the interchange of numberless and typically anonymous buyers (demand) and sellers (supply) within a competitive markets. The law of supply and demand is what drives the free market economy. Supply and demand is what sets the prices of goods and services in the free market economy. As supply goes up the prices go down. When the demand goes up the prices go up. Due to low government control, people are free to spend their money the way they want to. Capitalism thus suggests a system of economic regulation that involves minimal government involvement. The authorities do not have a say in the economic decisions of individuals. Some examples of countries close to capitalism are The United States of America, Germany, and England. Under fully developed capitalism, like in the USA, it is the class of capitalists that exploits the class of workers. [FLVS, 2000-2006](Online)

On the other end of the spectrum is a socialist system. The answers to the basic economic questions are made by a central authority, usually the government. Socialism is an economic system whereby the means of production are seized and monopolized by the government without compensation to the builders of the capital, and where investments, production, distribution, income, prices, and economic justice are subject to administer substantially by the government. Socialism seeks to prioritize human welfare over other goals, such as profit and wealth. In socialism, there is very little private property and the government is directed for all major economic decisions including prices. A central authority draws up plans that establish what will be produced and when, sets targets and objectives, and makes rules for allocation of resources accordingly to achieve the targets. Individuals are not allowed to take risks so there are no rewards to benefit from. China, Vietnam, North Korea and Cuba are example of socialist countries. [Ranjeeta...
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