Chapter 3, Problem 1P

To determine

The three basic economic questions.

Explanation of Solution

The three basic economic questions that every economy face is:

1. What to produce?
2. How to produce?
3. Whom to produce?

In the planned economy (command economy) the central economic questions what, how and whom to produce is resolved by the central planned authority or the government. The government controls all the factors of production (land, labor, capital, and entrepreneurship) and has full control over the economy. While in the market economy, the decisions are based on the market forces. Under this economy, firms or businesses are controlled by private hands and decisions related to determining the price of the commodity, size of quantity etc. is determined by the aggregate demand and supply in an economy.

Economics Concept Introduction

Free Market Economy: It is a system of the market in which prices of commodities are determined by the open market. Basically, demand and supply forces of market play important role in the determination of prices. The free market economy is very competitive, and industries are perfectly competitive. Hence allocation of resources occurs very efficiently.