EconomyEconomy is the correct and effective use of available resources. It is concerned with all the activities related to production and distribution of goods and services in a specific geographical region. According to British economist Robbins, L (2006), "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. ” Economics is essentially the study of how society manages its scarce resources. Every government irrespective of the form of government, who is running the government and the type of economic system, has to answer three basic economic questions.
These questions concern the allocation of available resources for different purposes. Any economic system must decide the allocation of available resources among the producers, the mix of output and the distribution of the same output. This allocation must be decided no matter what the scale of economy and the level of development is (Econguru, Online). All societies are gifted with resources by the nature and previous generations. These resources are primarily scarce. It is the responsibility of every economy, every government to decide how to use the minimum resources available most effectively in order to satisfy human wants.
Resources must particularly be allocated among producers who transform the resources into goods and services, which in turn must be distributed effectively to households which have needs. The three basic economic questions are, what to produce, how to produce and for whom to produce (Jan, C, M, 2001). All economies and businesses must decide what goods or services to produce with the limited resources available to them. A society or economy must decide how much food and shelter to produce in order to meet the needs of its population and businesses should decide how much of the goods and services to produce.
For example any economy is in charge of producing the basic needs of people such as food grains, meat (in some countries), water, milk and housing. These are the basic essentials that the population requires. The second question is how to produce. There are several ways to produce a good or service of good quality. An economy must decide it should take on the production and sale of goods and services by itself or hand part of it over to businesses.
It must decide whether the production of such goods must take place within the country or must be outsourced to other countries. Lastly it must decide whether the production should be labour or capital intensive. For example, some services such as essentials, roadways, railways etc are retained and produced by the government, while the production of other goods and services such as clothing, consumer goods etc are given over to businesses.
The final question to be answered is for whom to produce. Each good or service is produced for the consumption of someone. The economy must decide for whom it is going to produce a particular good or service. For example while essentials such as food grains, milk etc are produced and targeted towards the entire population, certain luxury products such as air conditioners, cameras, hotel industry etc are targeted towards a select percentage of the population.