Four Functions of an Economic System by Evangeline Endacott

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        The four functions of the Economic System

 An economy is the way in which a population is formed to solve the economic problem. All types of economics, from market to planned, incorporate the co-ordination of economic functions in order to solve the economic problem, including; resource allocation, production and distribution. These economic functions also provide a law and order framework for the exchange of goods and services in terms of economic markets. Whilst economic organisation have evolved into numerous different forms with different approaches to the economic problem, they all involve answering the four basic question based on solving the economic problem:

1. What to produce?
2. How much to produce?
3. How to produce?
4. To whom to distribute?

What to Produce?

Due to the scarcity of resources (land, labour, capital and entrepreneurial) that are used to produce goods and services, decisions have to be made over what is to be produced. Economies answer this question by responding consumer’s scale of preferences for specific goods and services over others. Individual producers will be guided by consumer preferences to determine what goods and services should be produced. If the resources are assigned correctly, then allocative efficiency will occur in which producers will maximize profits and consumers’ wants and needs will be satisfied.

How much to Produce?  

The economic problem also raises the question of ‘how much to produce’ which determines the quantities of the goods and services to be produced in relation to the availability of resources and the pattern and level of consumer demand. This questions is extremely important to solving the economic problem for two reason. One reason is that the estimated quantities influence the levels of resources at the producers’ disposal.  Another reason is that volume of demand must reflect the volume of production in order to achieve the most efficient resource allocation. This balance is dire as if, insufficient resources are designated to production then there will be a shortage of goods and services which would leave some consumers unsatisfied. Alternatively, if resources are over-allocated then excess goods and services will be produced resulting in the waste of resources.