Five Fundamental Questions

Question 1

What must be answered by all economic systems?

Remember: How and What goods and services will be COPped?

Answer 1

1. ) What goods and services will be produced?
2. ) How will goods and services be produced?
3. ) Who will get the output?
4. ) How will the system accommodate change?
5. ) How will the system promote progress?

Question 2

What will be produced?

Answer 2

In order to be profitable, businesses must respond to consumers’ (individuals, other businesses, and the government) wants and desires.

Question 3

How will goods and services be produced?

Answer 3

1. ) The market system encourages and rewards those producers who are achieving least-cost production
   - most efficient technique will be the one that produces a given amount of output with the smallest input of scarce resources when both inputs and outputs are measured in dollars and cents

Question 4

What are examples of least-cost production techniques?

Answer 4

Locating firms in the optimum location considering

• resource prices
• resource productivity
• transportations
• available technology
• general resource prices

Question 5

Who will get the output?

Answer 5

• Directly related to how the income is distributed among individuals and households and the tastes and preferences of customers

Question 6

What determines income?

Answer 6

Resource Markets

Question 7

How will the system accommodate change?

Answer 7

Markets are dynamic;

As technology progresses, tastes change, and resource supplies change, what is efficient today may be inefficient tomorrow.

Prices help signal that.

Question 8

What happens to price and output when demand increases? (Vice versa)

Answer 8

• Prices and output increase (Vice versa)

- Leads to more profits and new firms (Vice versa)

Question 9

How will the system promote progress?

Answer 9

• promotes technological improvements and capital accumulation
• profit and revenue rewarded to entrepreneurs or firms that introduce a popular new product
• new technologies that reduce production costs will spread throughout the industry as a result of competition
• creative destruction; when entrepreneurs or firms cannot adjust to competition or change
• requiring additional capital to advance technology