The three basic economic questions which determine resource allocation: who to produce for

Published by Patrick Mutisya · 14 days ago

Cambridge IGCSE Economics 0455 – The Basic Economic Problem: Resource Allocation Decisions

The Basic Economic Problem – Resource Allocation Decisions

Objective

Understand the three basic economic questions that determine how scarce resources are allocated, with a focus on the question: who should the output be produced for?

Why the Question “Who to Produce For?” Matters

In an economy with limited resources, choices must be made about the distribution of goods and services. The answer to “who gets what?” influences income distribution, social welfare, and economic efficiency.

Key Concepts

  • Distribution of Income: Determines who has the purchasing power to buy goods and services.

  • Equity vs. Efficiency: Trade‑off between a fair distribution (equity) and maximizing total output (efficiency).

  • Allocation Mechanisms: The methods societies use to decide who receives which goods.

Allocation Mechanisms

The three main ways an economy can answer “who to produce for?” are summarised below:

MechanismHow it WorksAdvantagesDisadvantages
Market AllocationGoods are distributed through the price mechanism; those with higher willingness and ability to pay purchase the goods.Encourages efficiency; reflects consumer preferences.Can lead to inequality; essential goods may be unaffordable for low‑income groups.
Command (Planned) AllocationGovernment decides who receives what, often based on need or social goals.Promotes equity; can ensure basic needs are met.May reduce incentives for producers; risk of misallocation and shortages.
Mixed AllocationCombination of market forces and government intervention (e.g., subsidies, welfare programmes).Balances efficiency with equity; flexible.Complex to manage; may involve bureaucratic costs.

Factors Influencing the Choice of Allocation Method

  1. Level of economic development.

  2. Societal values (e.g., emphasis on equality vs. individual freedom).

  3. Nature of the goods (necessities vs. luxuries).

  4. Government capacity and administrative efficiency.

Illustrative Example

Consider a country with a limited supply of a life‑saving vaccine.

  • Market Allocation: The vaccine is sold at a high price; only those who can afford it receive it.

  • Command Allocation: The government distributes the vaccine free to high‑risk groups, regardless of income.

  • Mixed Allocation: The government subsidises the vaccine, lowering the price so that a broader segment of the population can purchase it.

Evaluation of Allocation Methods

When evaluating which method best answers “who to produce for?” teachers should encourage students to consider:

  • Impact on equity – does the method reduce poverty and inequality?

  • Impact on efficiency – does it make the best use of scarce resources?

  • Administrative feasibility – can the method be implemented effectively?

  • Political acceptability – is the method supported by the majority of citizens?

Suggested Diagram

Suggested diagram: A flowchart showing the three allocation mechanisms (Market, Command, Mixed) and their effects on equity and efficiency.

Key Take‑aways

  • The question “who to produce for?” is central to the distribution of goods and services.

  • Different allocation mechanisms reflect different societal priorities.

  • In practice, most economies use a mixed approach to balance equity and efficiency.