Each society is faced with a problem concerning their economic state. The economic problem is that there are finite resources in relation to unlimited wants. This problem brings about the need for a system to answer questions (what, how, how much, who) that will solve it in the most effective way. An economic system is the organisational and institutional pattern through which choices are made about which wants to satisfy, and how to allocate resources to do this. The different economic systems include planned economies, market economies and traditional economies. Australia has a mixed-market economic system in which there is a mixture of control by the government and freedom of individual enterprise and in which the basic economic questions are answered in the market place.
An economic system must answer the questions 'what to produce?', 'how much to produce', 'how to produce' and 'for whom to produce'. The economic problem creates a situation where economies must decide which good or service to produce at the cost of another good or service not being produced, as a result of the limited resources available.
For example, toffee apples are produced at the opportunity cost of fantails. The decision of the quantities the good will be produced in must also be determined. The question of 'how to produce' refers to the combination of resources used to produce a good or service. For example, a particular confectionary item can be produced by human effort (labour) or machines (capital), hence, the decision of which is the more efficient means of production must be made. Who gets the goods and services that are produced is the final decision that is made in production; it determines to whom the goods and services will be distributed to.
Different economies handle the economic problem in different ways depending on...