Economic problem

Economic systems as a type of social system[1] must confront and solve the three fundamental economic problems:[2]

  • What kinds and quantities of goods shall be produced, "how much and which of alternative goods and services shall be produced?"[2]
  • How shall goods be produced? ..by whom and with what resources (using what technology)...?"[2]
  • For whom are the goods or services produced? Who benefits? Samuelson rephrased this question as "how is the total of the national product to be distributed among different individuals and families?"[2]

Economic systems solve these problems in several ways:"... by custom and instinct; by command and centralized control (in planned economies) and in mixed economies[2] that "...uses both market signals and government directives to allocate goods and resources."[3] The latter is variously defined as an economic system blending elements of a market economy with elements of a planned economy, free markets with state interventionism, or private enterprise with public enterprise..."[4]

Samuelson wrote in Economics, a "canonical textbook" of mainstream economic thought[5] that "the price mechanism, working through supply and demand in competitive markets, operates to (simultaneously) answer the three fundamental problems in a mixed private enterprise system..."[2] At competitive equilibrium, the value society places on a good is equivalent to the value of the resources given up to produce it (marginal benefit equals marginal cost). This ensures allocative efficiency-the additional value society places on another unit of the good is equal to what society must give up in resources to produce it.[6]

The solution to these problems is important because of the "fundamental fact of economic institution life" that ...[2]

"The economic problem, "the struggle for subsistence", always has been hitherto primary, most pressing problem of the human race- not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms." -Samuelson, Economics, 11th ed., 1980
  1. ^ Gregory, and Stuart, Paul and Robert (February 28, 2013). The Global Economy and its Economic Systems. South-Western College Pub. p. 30. ISBN 978-1285055350. Economic system – A set of institutions for decision making and for the implementation of decisions concerning production, income, and consumption within a given geographic area.
  2. ^ a b c d e f g Samuelson, P. Anthony., Samuelson, W. (1980). Economics. 11th ed. / New York: McGraw-Hill. p. 34
  3. ^ Schiller, Bradley. The Micro Economy Today, McGraw-Hill/Irwin, 2010, p. 15.
  4. ^ Schiller, Bradley. The Micro Economy Today, McGraw-Hill/Irwin, 2010, p. 15. "Mixed economy - An economy that uses both market signals and government directives to allocate goods and resources." This follows immediately from a discussion on command economies and market mechanism.
  5. ^ Pearce, Kerry A.; Hoover, Kevin D. (1995), "After the Revolution: Paul Samuelson and the Textbook Keynesian Model", History of Political Economy, 27 (Supplement): 183–216, CiteSeerX 10.1.1.320.9098, doi:10.1215/00182702-27-supplement-183
  6. ^ Callan, S.J & Thomas, J.M. (2007). 'Modelling the Market Process: A Review of the Basics', Chapter 2 in Environmental Economics and Management: Theory, Politics and Applications, 4th ed., Thompson Southwestern, Mason, OH, USA