A mixed economy combines elements of tradi- tional, market, and command economic models to answer the three basic economic questions. Because each nation’s economy is a different blend of these three economic models, econo- mists classify them according to the degree of government control.

Traditional economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it. In a centrally planned economy the central government makes all decisions about the production and consumption of goods and services.

As a result of scarce resources, societies must answer three key economic questions: – What goods and services should be produced? – How should these goods and services be produced? – Who consumes these goods and services?

What must we produce? How should we produce it? For whom should we produce?

In order to meet the needs of its people, every society must answer three basic economic questions: What should we produce? How should we produce it? For whom should we produce it?

Examples of economic problems include How to deal with external costs/pollution, e.g. pollution from production. How to redistribute income to reduce poverty, without causing loss of economic incentives. How to provide public goods (e.g. street-lighting) which are usually not provided in a free market.

Answer: The four basic problems of an economy, which arise from the central problem of scarcity of resources are:

• What to produce?
• How to produce?
• For whom to produce?
• What provisions (if any) are to be made for economic growth?

The fundamental economic problem facing all societies is that of scarcity. Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have.

For example, private enterprise and individuals own most of the factors of production in capitalism. However, collective good is the predominating principle in socialism. As such, factors of production, such as land and capital, is owned and regulated by the community as a whole1 .

Households own all the factors of production: land, labor, capital. These factors of production are sold to the firms to produce goods and services through factor markets. As the households purchase goods and services from firms it is their consumption expenditure which in turn becomes income or profits for the firms.

Money is not considered as a factor of production. Money is medium of exchange and hence it cannot help to increase the productivity of an economy like other factors of production, thus the factors of production are Land, Labour, Capital and Entrepreneurship.

It is the produced means of production. Examples are—machines, tools, buildings, roads, bridges, raw material, trucks, factories, etc. An increase in the capital of an economy means an increase in the productive capacity of the economy.

Aim of production is to produce goods and render services to the economy. a) The first factor of production is land, but this includes any natural resource used to produce goods and services.

The main aim and objective of production control is to produce the products of right quality, in right quantity at the right time by using the minimum effort and cost.