explain whom to produce?

This problems deals with the issue of deciding the category of people who will consume the goods. That is to produce goods for the poor or for the rich. Since the resources are scarce, the economy has to decide for whom it will produce goods.

In order to meet the needs of its people, every society must answer three basic economic questions:

A society (or country) might decide to produce candy or cars, computers or combat boots. The goods might be produced by unskilled workers in privately owned factories or by technical experts in government-funded laboratories. Once they are made, the goods might be given out for free to the poor or sold at high prices that only the rich can afford. The possibilities are endless.

Although every society answers the three basic economic questions differently, in doing so, each confronts the same fundamental problems: resource allocation and scarcity.

Resources are all of the ingredients needed for production, including physical materials (such as land, coal, or timber), labor (workers), technology (not just computers but, in a broader sense, all the technical ability and knowledge that is necessary to produce a given commodity), and capital (the machinery and tools of production). Scarcity refers to the essential fact that people’s wants or desires are always going to be greater than the resources available to fulfill those wants.

Simply put, scarcity means that resources are limited. No country can produce everything, no matter how rich its mines, how massive its forests, or how advanced its technology. Because of the constraints of scarcity, then, decisions must be made about resource allocation (that is, how best to allocate, or distribute, resources for the maximum benefit of the society).

Questions of scarcity and resource allocation are as old as human civilization. Throughout history every society—whether society is defined as a nation, a tribe, or a single family—has had to determine what to produce, how, and for whom. While indirect attempts to answer these questions can be found in the writings of the ancient Greek philosophers Plato (c. 427–c. 347 bc ) and Aristotle (384–322 bc ), the questions were not articulated in their current form until economics was introduced as a discipline of study more than a thousand years later.

Modern economic theory as we know it today is founded on the writings of the Scottish philosopher Adam Smith (1723–90), especially his best-known work, a five-book treatise called An Inquiry into the Nature and Causes of the Wealth of Nations. Ever since this groundbreaking work was published in 1776, many competing economic theories have been presented, but all of them have been organized around the attempt to answer the three basic questions.

For every society the answers to the three basic questions depend on what kind of economic system it uses. The term economic system refers to the way in which a society organizes the production and distribution of good and services. The system that a society chooses reflects the philosophical and political ideas on which that society is founded. Historically, there have been three basic types of economic system: traditional, command, and market.

A traditional economy is rooted in long-standing cultural customs. Resources (especially land) are allocated through inheritance or by decisions of cultural leaders, and the new generation performs the same economic roles as their parents and grandparents before them. Traditional economies are founded on a strong philosophy of social interdependence and community. They usually revolve around subsistence farming, in which food is grown to feed the members of the community, not to sell or trade in markets. Although most traditional economies have been replaced by more modern economic systems, they can still be found in the agricultural areas of developing countries in Asia, Africa, and South America.

A command economy (also called a planned economy or centrally planned economy) is one in which economic decisions are controlled by a central authority, usually the state (government). The state controls the society’s capital (means of production) and decides how resources should be allocated (including what should be produced, how prices should be set, and how much people should be paid for their work). Command economies go hand in hand with socialist or communist political philosophies, which emphasize the equal distribution of wealth but do not support individual entrepreneurship or the acquisition of private property. The Soviet Union was the most prominent planned economy of the twentieth century.

A market (also called capitalist) economy is one in which answers to the three basic questions are the cumulative result of many individual decisions about what to buy and what to sell in the public marketplace. Buyers express their preference for certain goods and services, thereby influencing what is produced. The means of production are privately owned by sellers, who try to produce things as cheaply and efficiently as possible in order to make a profit (meaning that they sell an item for more than it cost to produce). In its purest form a market economy should function without any government intervention. Market economies are founded on the idea that the good of the whole society depends upon freedom of choice, competition, and the right of every individual to pursue private wealth. The United States is the largest market economy in the world.

What to produce?

How to produce?

For whom to produce?

This helps to understand which good or services are required in the society (what to produce?) with which technique these are to be made (how to produce?) and who would consume these goods( for whom to produce?).

There are different needs of every human in the society, considering that it is decided which goods and services are to be produced and in what quantity are they required in the society. As the resources are scarce, the production of one means sacrificing another. Production has to be done in a way that maximum satisfaction is achieved by society by looking into what is more important than another.

For example, the construction of a hospital can be done by giving up a highway. A public park or a school can be built on the same land, one has to decide what needs to be built by studying which is a more important need of the area.

There are different types of needs in society. Goods are of different categories from consumer goods, capital goods to civil goods or war goods. Keeping in mind the requirement of each their quantity is decided.

This refers to different aspects of production from selecting which raw materials to be used, what technique of production has to be adopted, and where these goods would be produced. How means deciding the manner in which the goods are produced largely deals with deciding what amount of labor would be involved. There is a capital-intensive technique where more machinery is used and then there is labour intensive technique where more manpower is used.

Goods can be produced in-house or made in a foreign land. In-house production means employment generation whereas foreign land production means goods produced at a lesser price. All these aspects need to be seen keeping in mind their effect on society.

For example, the production of textiles can be done either by handloom or machine-based. The method which gives more output with lesser cost getting involved is chosen. In a country like India where there is an abundance of labor handloom can be chosen whereas in countries like the USA where the labour cost is high machine-based production is preferred.

This involves deciding who is the end consumer of the goods or services that are produced. Every good produced is made for a specific section of society as every product cannot satisfy all the sections of society due to difference in the paying capacity of the consumer. Inequality in the distribution of income can be noticed in society because of which there is a difference in the paying capacity of the consumer.