Scarcity forces every economy to decide what to produce, how to produce it and who gets it.
Because resources are scarce, every economy must answer three basic economic questions. What to produce: which goods and services, and how much of each. How to produce: which methods and which mix of workers and machines. For whom to produce: who receives the output.
Different economies answer these questions in different ways. In a market economy, prices and profit mostly decide. In a mixed economy such as Singapore, the government also decides some answers, for example by building public housing and schools.
An economic good uses scarce resources to produce, so it has an opportunity cost. Most goods are economic goods, including many that are given away, such as free school textbooks: someone still pays for the paper, printing and transport.
A free good is one that needs no scarce resources, so it has no opportunity cost. Air to breathe and sea water on a beach are examples. Using more of a free good does not mean giving up anything else.
- Three basic questions
- What to produce, how to produce, for whom to produce.
- Economic good
- Uses scarce resources, so it has an opportunity cost.
- Free good
- Needs no scarce resources, so it has no opportunity cost, such as air.
Worked example: Sorting a firm's decisions into the three questions
A car maker is planning next year's production. Each decision answers one basic question.
- What to produce: should it make 60% electric cars and 40% petrol cars, or switch fully to electric?
- How to produce: should it use more robots on the assembly line or hire more workers?
- For whom to produce: should it aim at budget buyers, luxury buyers or overseas customers?
Watch out for this
Anything that is given out free of charge is a free good.
Price is not the test. Free school meals use food, cooks and kitchens, so they are economic goods paid for by someone. A free good uses no scarce resources at all.
Check your understanding
A firm decides to use more machines and fewer workers in its factory. Which basic economic question is it answering?
- How to produce
- What to produce
- For whom to produce