2⃣

Chapter 2-Three Basic

Economic Problems
The Three Basic Economic Problems
The three basic economic problems

What to produce
Choice of the types and quantities of goods and services to produce
There is trade-off between different types of goods to be produced

How to produce
Choice of production methods
What kinds of factors of production CELL to use and their quantities

For whom to produce

Choice about how goods and services are distributed
Criteria include age and income

Methods of Tackling Economic Problems

Chapter 2Three Basic Economic Problems 1

 Ways to tackle economic problems

 By customs and traditions

By government command
In a planned economy, the government owns most of the resources. The
government decides how the resources and goods are allocated

By market mechanism
In a market economy (market-oriented economy). most resources are
privately owned. Allocation of resources and goods are guided by market
prices (market mechanism or price signal/mechanism)

Market economy vs planned economy

💡 HK is a mixed economy

Private Property Rights

Specialization
When different people or economies concentrate on the production of a
particular good or a particular production stage of a good

Exchange
Exchange is a condition for specialization

Private property right IMPORTANT

Chapter 2Three Basic Economic Problems 2

 Exclusive right to use the good
Owner can exclude other from using his property and has the right to use
the property in any way

Exclusive right to receive income generated by the use of the good

Right to transfer the good

The owner has the right to transfer his or her property to other people

💡 The transfer may not necessarily involve compensations

💡 If private property rights of a good do not exist or not well-defined,

the good will become a common property and exchange will not take
place. Instead of using price mechanism, other methods will be used
to allocate resources (e.g. violence)

Well-defined private property rights is a prerequisite for the use of price

mechanism by which resources could be allocated to the highest-valued users.

Chapter 2Three Basic Economic Problems 3