In every
government, no matter what the form of government, what the type of economic system, who is running the government or how poor or rich it is, three basic economic questions must be answered. They concern the problem of
resource allocation, which is simply
how resources will be allocated. As such,
resource allocation answers the three basic economic questions of what, how and for whom goods and services will be produced.
- What will be produced? Literally billions of different things could be produced with society's scarce reources. What mechanism exists that causes some things to be produced and others to remain as individuals' unfulfilled desires?
How will it be produced? There are many ways to produce a desired item. It is possible to use more labour and less capital or vice versa. It is possible to use more unskilled labour and fewer units of skilled labour. How, in some way, are decisions to be made as to the particular mix of inputs, the way they should be organized and how they are brought together at a particular place?
For whom will it be produced? Once a commodity is produced, who should have it? If individuals and businesses purchase commodities with money income, the question then is what mechanism there is to distribute income, which then determines how commodities are distributed throughout the economy.