Fundamental Questions of Economics

The model economy we have been discussing illustrates an important point about all real modern economies. The model economy faces a menu of choices among different outputs of gadgets and corresponding outputs of food. Somehow, they must decide how much food and how many gadgets to produce and also arrange that the producers of food and gadgets get the appropriate resources to do the job. But the real world is much more complex than the model economy. In a modern economic system, people take thousands or even millions of distinct and complementary roles in the production of many thousands of distinct goods and services. But they cannot carry out their distinct tasks without resources. How much resources, and what kind of resources, should each person have in order to do his or her distinct task? And how much do each of them get in fact? Many textbooks put the point this way: any modern economic system must somehow decide the answers to four fundamental questions:

We should recall two points to avoid confusion.

First, decisions on the allocation of resources need not be made by government or any other authority. Markets, negotiation, or tradition may determine what resources are available for which task, and markets are known to have some advantages in doing this job. In general, markets tend to rationalize the allocation of resources in society; that is, to make the allocation of resources more rational than it would otherwise be. Of course, there are important exceptions and qualifications to this rule.

Second, we should not interpret "resources" too narrowly. Natural resources (i.e. land, water, wild living things and minerals), important as they are, are not the most important resources. In every economy, labor is the most important resource both in terms of cost and productivity. Goods and services produced by past labor, including machinery, buildings, agricultural biostocks, and the like, -- that is, capital goods -- are also very important resources. In economics, "allocation of resources" includes the allocation of all of these things.

Summary on Neoclassical Economics

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