Chapter 2.1, Problem 2R

To determine

To analyze the three basic economic question that an economic system has to answer.

Explanation of Solution

Scarcity means the difference between a human being's limited resources and boundless desires. It is the fundamental problem faced by all economies. So, the economic system has to answer three basic economic questions.

1. What to make? : Economic agents have to determine what to make, given the limited resources such as raw materials, labor and time. Most primitive economies concentrate on shelter and food production which is very essential for life. With improved efficiency, however, the economy has more resources available which can be used for non-necessary items, such as education and leisure.
2. How to make? : The firm seeks to develop the most profitable to cost-effective method of generating products. This inspiration lies behind technological development and more effective methods of production, such as the assembly line.
3. For whom to make? : Within a free market, those with the willingness to pay are supplied with goods. This can be through a quick barter in primitive economies or cash payments in more developed economies.