This document discusses how societies answer four key economic questions: what to produce, how to produce it, how much to produce, and who gets to consume goods and services. It explains that scarcity necessitates difficult decisions about allocating limited resources. The price mechanism and market forces help coordinate these decisions through price signals that incentivize efficient behavior and ration scarce resources based on ability to pay.

1. THE ROLE OF MARKETS &
PRICES
Economic Questions

2. SCARCITY AND SOCIETY
• Due to scarcity, societies and countries are forced to make some
difficult decisions.
• To aid in this process different systems have evolved over time.
• Economic System – the method used by a society to produce
and distribute goods and services based on its values and goals.

3. THE 4 ECONOMIC QUESTIONS
• Each society must answer the following economic questions…
•
• What goods and services should be produced?
• How should these goods and services be produced?
• How much should be produced?
• Who consumes these goods and services?

4. 1. WHAT SHOULD BE PRODUCED?
• What should be produced? (e.g. Farmer decides to
plant an extra 500 hectares in wheat to meet extra
demand in pasta industry)
• What types of goods and services will satisfy the
needs and wants of the society.
• No point producing something that is not required.

5. 2. HOW SHOULD IT BE PRODUCED?
• Each society must determine how to use its
factors of production to meet the demands of
that society.
• Land,
• Labor and
• Capital
• e.g. A factory introduces $55,000 computerised
machine, redeploy 5 staff to sales
• The most efficient way to use the resources
available to you (land, labour, capital and
enterprise) to produce goods and services.
• The minimum opportunity cost to the society.
• Depends on the level of technology, the kinds
of goods and services, and the scarcity of
resources (labour and capital).
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6. TWO TYPES OF PRODUCTION.
• Labour intensive (abundance of low cost labour)
• Large quantities of labour, little capital. (less
developed countries)
• Capital intensive ((abundance of low cost capital –
high cost labour)
• Large quantities of low capital equipment.
(advanced modern economies)

7. HOW MUCH TO PRODUCE?
• The amount and types of resources available
determines how much can be produced
• Society must decide how much to produce of
each goods and service based on this
criteria.
• Produce too little of something regarded as
important people will be unsatisfied
• Produce too much and you will waste
precious resources.

8. 4. WHO CONSUMES THE PRODUCTS?
• How to distribute (for whom should the
goods be produced and how equally
distributed)?
• Who decides the quantities of goods and
services each should receive from the total
produced.
• The answer to this is how the society
chooses to distribute income.
• Decision: equal or unequal distribution of
income (how much inequality)
• The way in which a country or small
community answers these questions will
determine the type of economic system it
will develop.

9. WHO GETS ACCESS TO GOODS AND
SERVICES?
• Possible government intervention to share
wealth to those that do not contribute to
production process such as the aged,
unemployed and disabled (taxes, social
security, pension)

10. PRICE MECHANISM
• Adam Smith spoke of the ‘invisible hand’
– through the pursuit of individual self-
interest, resources are allocated in
society’s best interests
• “The means by which the many millions of
individual decisions each day by
consumers & firms interact to determine
the allocation of scarce resources.”

11. THE SIGNALLING FUNCTION
• Market prices adjust to ‘signal’ to producers where resources are needed more and
less
• Eg. if consumers want more iPods and less portable CD players, prices for iPods will
rise, signalling to producers to allocate resources to their production

12. INCENTIVE FUNCTION
• Prices provide incentive for consumers & producers to use resources in the most
efficient way
• Eg. high prices encourage efficiency; low prices encourage utilisation of less valued
resources

13. RATIONING FUNCTION
• Resources are scarce
• Prices allocate resources to those willing to pay
• Eg. the more scarce a resource, the higher its price will be and the less people will
want / be able to have it