Ch.2 The Three Basic Economic Problems and Private Property Rights

Question 1

What are the three basic economic problems?

Answer 1

What to produce, how to produce and for whom to produce.

Question 2

What is what to produce?

Answer 2

It refers to making choices about what the kinds and quantities of goods to produce.

Question 3

What is how to produce?

Answer 3

It refers to making choices about the methods of production. After deciding to produce, people need to decided what kinds of produce and the quantities to use to produce goods and services.

Question 4

What is for whom to produce?

Answer 4

It refers to choice about how to distribute the goods to people in society. A society needs to set some criteria to decide who can get the goods and in what quantity.

Question 5

What are solutions that can tackle the three basic economic problems?

Answer 5

1. Customs and traditions/ Traditional Economy
2. Government decisions/ Planned Economy
3. Market mechanism/ Market Economy

Question 6

How is ‘What to produce’ tackled in traditional economy?

Answer 6

They decide what to produce based on customs and traditions. They usually produce things similar what their ancestors to produced.

Question 7

How is ‘How to produce’ tackled in traditional economy?

Answer 7

People decide how to produce based on their customs and traditions. They follow the ways of their ancestors

Question 8

How is “for whom to produce” tackled in traditional economy?

Answer 8

People follow their customs and traditions to allocate goods and assets.

Question 9

Who own the resources in market economy?

Answer 9

Most resources and properties are privately owned.

Question 10

How are the resources allocated in market economy?

Answer 10

Resource allocation is directed by market prices.

Question 11

For whom are the goods allocated in market economy?

Answer 11

Income is distributed in market mechanism.

Question 12

Who makes the economic decisions in market economy?

Answer 12

Private individuals make decisions on production and consumption, according to price.

Question 13

Who owns the resources in planned economy?

Answer 13

Most productive resources and properties are owned and controlled by the Government.

Question 14

How are the resources allocated and for whom are goods allocated in planned economy?

Answer 14

Resources are allocated and is distributed by means of government plans and commands.

Question 15

Who makes economic decisions in planned economy?

Answer 15

People follow government’s plans and commands in production and consumption.

Question 16

What are the functions of market price?

Answer 16

1. Allocative functions includes providing incentives and transmitting information.
2. Rationing (Income distribution)

Question 17

Explain on providing incentives of allocative functions and which economic problems can be tackled from providing incentives.

Answer 17

Private firms can receive the market price of the goods as income. “What to produce” could be tackled.

Question 18

Explain on transmitting information of allocative functions and which economic problems could be tackled.

Answer 18

1. In product market, for the market prices of goods, if the demand increases, the market price will increase. It reveals the preferences of customers.
2. In factor market, inputting prices reveals the cost of production and the producers usually choose the least cost production method to minimise production cost.
   It involves how to produce”.

Question 19

Explain on rationing and which economic problem can be tackled.

Answer 19

People have to produce and earn income so they can pay for the goods they want. The market distributes the goods on the basis of people’s willingness and ability to pay the market price. The price mechanism allocates the economic goods to the highest-valued users.

Question 20

In reality, what type of economy is used?

Answer 20

Mixed Economy. It is a mixture of the traditional, planned and market economy. In reality, it is hard to find a purely traditional, a purely planned or a purely market economy. Mixed economies can be found all over the world with varied extent of government intervention.

Question 21

What is specialisation?

Answer 21

Specialisation means that different parties concentrate on producing different goods. It occurs when workers specialise in producing a good or a stage of production of a good. Given the same amount of scarce resources, when people specialise in producing the goods or services in which they have an advantage, the total output of the economy will be higher than that without specialisation. More goods can be produced.

Question 22

What is exchange?

Answer 22

Exchange means buying and selling of goods and services. With specialisation, people do not produce everything they consume.

Question 23

Explain more on exchange.

Answer 23

With specialisation, people do not produce everything they consume. They can exchange the goods they want in the market. With exchange, people can consume more goods. Thus, they can enjoy a higher standard of living.

Question 24

What is the relationship between exchange and Private Property Rights?

Answer 24

When people engage in exchange, they do need to identify the owner of the good. If there is no owner, exchange cannot take place.

Question 25

What are three sets of PPR?

Answer 25

1. The exclusive right to use.
2. The exclusive right to derive income from the good.
3. The exclusive right to transfer.

Question 26

In what ways are the private property rights safeguarded as?

Answer 26

The Basic Law, Article 105

Question 27

What are common properties?

Answer 27

1. Economic goods that have no owner.
2. Nobody can exclude any other from using or receiving income from or transferring it.

Question 28

What is the relationship between private property rights and competition?

Answer 28

Private property rights leads to price competition for exchange while lack of private property rights leads to non-price competition.

Question 29

What is the relationship between PPR, exchange and specialisation?

Answer 29

PPR first enables exchange, and exchange enables specialisation. With specialisation, output will increase. With an increase in the output, living standard will also increase.

Question 30

What is the importance of PPR in a market economy?

Answer 30

Well-defined and well-protected PPR are a prerequisite for the functioning of price mechanism.