The Three Economic Problems

Question

what are the three economic problems that every economic system faces.

extended this discussion to a company.

Answer

Samuelson (1952) argued every economic system has three problems; what to produce, how to produce it, and for whom it should be produced. As all economies have finite/limited resources available, all choices present opportunity costs (Bremer, 2015). Nationally, governments may wish to maximise production value/output, while ensuring citizens’ needs are met. The decision-making process depends on several factors; the type of economy, trade with other nations, and available resources (Mankiw, 2015). Production choices are directed by a central authority in command economies, whereas in free market economies, production manifests directly as a result of demand. Most economies are a mixture of command elements seen with military expenditure and free market enterprise with consumerism. International trade opportunities directly impact decisions; comparative advantage demonstrates that economies can maximise available goods by producing surpluses of goods created efficiently and trading for goods more difficult/costly to produce (Mendoza, Chua and Melchor, 2015). With limited available resources, all public and private consumption needs cannot be met, so decisions will also need to prioritise various stakeholder needs. Samuelson’s questions may also be applied to firms, with many parallel limitations. To survive, firms should produce revenues which meet or exceed costs (Baye, 2007). Shareholders usually desire profit maximisation (Howells and Bain, 2007). This constrains production choices to goods/services with an existing profitable market demand, or demand that may be stimulated (Kotler and Keller, 2011). Profits may be maximised by minimising opportunity costs (Nellis and Parker, 2006). This means identifying accessible, viable target markets, and developing cost effective production methods, which may include decisions regarding potential outsourcing/offshoring, with the possibility of benefiting from comparative advantages (Mintzberg, Ahlstrand and Lampel, 2008). In conclusion, it can be seen that by considering Samuelson’s (1952) three questions, firms may be able to optimise the value created with strategic decision making.

References

Baye, M., 2007. Managerial Economics and Business Strategy. New York: McGraw-Hill/Irwin.

Bremer, S.A., 2015. Simulated Worlds: A Computer Model of National Decision-Making. Princeton, NJ: Princeton University Press.

Howells, P.G.A., and Bain, K., 2007. Financial Institutions and Markets. London: Longman.

Kotler, P., and Keller, K., 2011. Marketing Management. 14th ed. Harlow: Prentice Hall.

Mankiw, N.G., 2015. Macroeconomics. New York: Worth Publishers.

Mendoza, R.U.,, Chua, K.C., and Melchor, M., 2015. Revealed Comparative Advantage, International Production Chain and the Evolving ASEAN-China Trade Linkages. Journal of Asian Development Studies, 4(1), pp.23–37.

Mintzberg, H.,, Ahlstrand, B., and Lampel, J.B., 2008. Strategy Safari: The Complete Guide Through the Wilds of Strategic Management,. Harlow: Financial Times/ Prentice Hall.

Nellis, J.G., and Parker, D., 2006. Principles of the Business Economics. Harlow: Prentice Hall.

Samuelson, P.A., 1952. Economic Theory and Mathematics–An Appraisal. The American Economic Review, 42(2), pp.56–66.