How society answers some basic economic questions ultimately determines the way we live.
What economic goods will be produced?
How will resources be used in production?
Who will get to consume economic goods?
Who will decide?
Current resources and technology limit a society to choosing one combination from the innumerable mixes of goods that could feasibly be produced in a given period. More of any one good means less of another. How much of each good would we like? Shall we have bigger government and a smaller private sector? More health care and less housing? More leisure and less work? Should we protect such endangered species as spotted owls if this drives up the costs of lumber and new housing, and reduces job opportunities in the Pacific Northwest?
Most goods can be produced with many different technologies. Crops can be harvested by hand or by machine. A swimming pool can be excavated in 1 day by 300 people with teaspoons in 1 month, by 30 shovel-wielders in 1 week, 1 or by operator and a backhoe. Thousands of Chinese push brooms along the streets of Beijing daily, while giant street sweepers rid our roads of debris in major US cities.
Even if we know what goods we want and how they will be produced, every society faces hard choices about equity (fairness): Who will get (a) income and wealth, and (b) specific goods? Personal senses of equity often turn on the distribution of income or wealth—broad claims to control over resources and goods. But this is only one facet of the “Who?” question, which ideally is resolved so that differences in people's preferences are accommodated. Some folks, for example, may work two jobs and forgo almost everything else to drive new cars, while some rich eccentrics happily drive rusty old pickups.
These basic questions—what, how, and for whom—seem simple, but each must be addressed almost countless times. For example, “What?” covers not only the types of goods to be produced from a to z, but also how much of each good. And each basic question is faced at different levels by individuals, families, business firms, government, or other social groups.
Who makes choices about what, how, and for whom can be critical. (Do you get to decide? Your parents? A boss? A government committee?) For example, college deans must decide what courses to offer, how they will be taught (small seminars, huge lectures, or computer labs), and who will receive admission and loans or scholarships. Students must choose what courses to take, whom to take them from, and how to study. (Will you attend class and do all homework, or party hearty and cram for finals?) Families must choose. Shall family funds be used for long vacations? ... your education? ... or ballet lessons for Baby? Government officials also choose. Should more or fewer resources be devoted to education? ... health care? ... retiring national debt?
The economic fabric of a society is woven from the composite of all the answers to these basic questions by all of its decision-making units. And our combined choices about what, how, and for whom automatically answer a related issue: When will goods or resources be used? Perishables such as bananas or newspapers lose value relatively soon after production, but durable goods such as stained glass windows or canned coffee can be stored for years. Similarly, some productive resources are perishable, while others last for centuries. For example, eight hours of labor are lost forever each day a worker is unemployed, but a vein of silver or a barrel of oil can be stored indefinitely. Each generation decides how much capital to accumulate and how many natural resources (rain forests, energy reserves) to leave for future generations.
Different aspects of these basic questions recur throughout economics. Relative scarcities of various goods are indicated by their prices—vital information (another scarce good) when choosing among limited alternatives. But what does “price” or “cost” mean? The answer is less obvious than you might think.