Scarcity and the Market System

As we have seen, two of the most important economic decisions faced by a society are deciding what goods and services to produce and how to allocate resources among their competing uses. The combination of goods and services produced can be resolved by government command or through market system. In command economy, a central planning board determines the mix of output. The experience by the changing economic and political event in the command economies of Eastern Europe and the former USSR.

In a market economy, economic decisions are decentralized and are made by the collective wisdom of the marketplace, i.e., prices resolve the three fundamental economic questions of what,how and for whom. The only goods and services produced are those that individuals are willing to purchase at a price sufficient to cover the cost of producing them. Because resources are scarce, goods and services produced are sold(distributed) to those who are willing and have the money to pay the prices.

Most countries have a mixed economy, a mixture of both command and market economies. For example, the United States has primarily a market economy, although the government produces some goods,such as roads,and finances these expenditures by taxing the income of individuals and businesses. The government may also regulate how the market operates,such as with minimum wage laws.