The main economic challenge is to choose the most efficient allocation of factors of production options to address the problem of limited capacity, which is caused by unfettered society's needs and limited resources. With information about their production capabilities, any society must answer the following five questions.
1. What should be done? Which set of products and services to best meet the material needs of society?
2. How much should be produced? To what extent, or how much of the resources available to borrow or use in the production process?
3. As these products should be produced? How should it be organized production?
4. Who will become (to use) this product? In particular, it should be distributed between the products of the economy by individual consumers?
5. Whether the system can adapt to the changes? Can the system make corrections due to changes in consumer demand in the supply of resources and so on?
What to produce?
An individual can provide yourself with the right products in various ways: to produce their own, to exchange for other benefits receive them as a gift. Society as a whole can not get everything at once. Because of this, it has to decide that they would like to have immediately to give what you can wait, but from what generally can not refuse.
Please be aware that it takes to produce a variety of consumer goods and services in accordance with the diverse needs of the people. Moreover, the answer to the question of what to produce, involves not only the definition of names of hundreds of thousands of products and services, but also the solution of the question of their number, as in any given short period of time to increase production of one good can be achieved by reducing the other.
How much should be produced?
Consumers are not subject to administrative restrictions and have cash income from the sale of resources, spend the money on the products that they are mostly willing and able to purchase. These costs are essentially the "ruble vote" through which consumers declare their needs, presenting marketable products. If the dialed quite a number of these "voices" businesses get the necessary stimulus for the start of production of the product.
Increasing consumer demand for a particular product eventually leads to the emergence of economic profits in an industry that produces the product. Such profits are a signal for the expansion of the industry and increase production of its product. Conversely, a decrease in consumer demand leads to losses and eventually to a reduction in output in the industry.
Consumers are showing their preferences in the form of demand to be met by the market of products, and manufacturers and suppliers of resources accordingly respond to this demand, to provide for their own interests. The market system conveys the desire of consumers to enterprises and suppliers of resources and tries to get the proper answer.
How to produce?
Production of the selected volume and product may be accomplished in various ways. Cultivate the land and harvest the crop, you can manually by attracting a significant number of unskilled labor. But can be applied to agricultural machinery, using a small number of skilled workers.
Most sectors of the modern economy (in manufacturing and mining, construction, etc.) manual labor is almost never used, but it does not eliminate the problem, select the mode of production, as the manager of any company is in a dilemma, what technology should be applied to production. From his choice depends on how effectively use the factors of production, what will be the output and, very importantly, what will be the quality of the extent to which it will meet the requirements of customers.
In many cases, the decision of the head as to produce, may be far from obvious. As a rule, the most profitable and progressive is the production of products using the most advanced technology. However, be aware that the introduction of new technologies is costly, and the head may not have sufficient amount of money, and manufactured products using old technology finds sales and bring in enough income. The issue, how to produce, will depend on whether there is a need to move to a new technology, there is room for it, there is the incentive to use the new technology, and many other circumstances.
For whom to produce?
Every product is distributed between consumers based on their ability and willingness to pay for it the current market price. The ability of the consumer to pay the equilibrium price for the product is determined by the size of his cash income.
In turn, the money income depends on the number of different physical and human resources provided by the recipient of income to the market and the prices at which these resources can be sold on the resource market.
Thus, the prices of resources play a key role in the formation of the amount of revenue that each household has to offer in exchange for a share of the social product. Within the monetary income of the consumer willingness to pay of the last equilibrium price for a certain product and decide whether to go the disposal of the user of said product or receive.
This willingness to buy a product depends on whether the consumer gives preference to the product when he compares it with other available close substitutes and the relative prices for them. Consequently, the prices of products, in turn, play a key role in shaping the structure of consumer spending.
Whether the system can adapt to the changes?
Industrial societies are dynamic: changing consumer preferences, production technology, the structure of the supplied resources. Specific system of resource allocation, which is currently the most effective and appropriate for the structure of consumer tastes, given the composition of alternative technologies and the structure of the supply of resources, can turn into an outdated and inefficient. This is due to the fact that over time, changing consumer preferences, and new production technologies and rebuilt part of the proposed resources.
While working on the price of the products and the profit, changes in consumer tastes dictate the expansion of some industries and the reduction of others.
These adjustments are realized through the resource market, as the expanding industry greater demand for resources and cutting industry to reduce the demand for them. Arising as a result of this change, resource prices will redirect resources from declining to expanding sectors.
In the absence of a market system to a certain administrative governmental planning agencies would have to take on the task direction of economic institutions and resources in specific types of