6/11/11

The three fundamental questions every economy has to answer. What, how, and for whom.


Today we begin the series going through introductory microeconomics, to help you learn economics: enjoy!

Introductory economics begins with the attempt to answer the following three questions about allocation.  Economists want to answer the what, how, and for whom question about goods and services that are produced in the economy.



What:  What gets produced, what goods or services we decide to make.  Do we want to make cars?  Sell haircuts?  Whenever a question asks about the what, make sure you choose a good or service as the answer, it will be something that you pay money for.

How:  How does something get produced?  Is it made by machines controlled by computers in a factory, or by a bunch of people making minimum wage keeping records on paper?  We have to decide how something is produced.  When a question asks about the how, focus on the process behind the production of the good, usually focusing on manufacturing or farming practices.

For whom:  Who gets the goods?  Is it the rich, or the poor?  Do people have to wait
in line to get the goods?  Generally in the United States, people who are willing to pay the price of the good get it, so income plays a big role.  Questions for whom, will generally have to do with wages, for example why doctors or ball players make more than janitors or teachers.  You could also be asked about how market economies vs. communist economies differ.

In order the answer these questions about the economy, we need to understand how these get decided.  Economists attempt to answer these questions by analyzing the difference and similarities between self-interest and social interest, which we will go over next time.

Remember:  When you get questions about the what, how, and for whom, they will probably give you a list of scenarios.  If you get a scenario about producing a certain good or service, the answer is what.  If you get a scenario about production decisions or locations, the answer is how. And if it is a question about wages, or return on investment, the answer is for whom.


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