Every society must decide what goods and services to produce, how to produce them, and for whom they will be produced. Although these questions focus attention on different parts of economic activity, they are not separate decisions. Together, they provide a framework for understanding how a society allocates its productive resources.
Scarcity is what makes these decisions necessary. Land, labor, capital, and entrepreneurship can be put to different ways, but they cannot be used for every purpose at the same time. When resources are directed toward producing one good or service, fewer resources may be available for other purposes. Deciding what to produce therefore involves trade-offs, and the value of the most important alternative given up represents an opportunity cost.
Decisions about how to produce also involve choices among alternatives. The same goods or services may be produced using different combinations of workers, capital, natural resources, and technology. Choosing a method can impact costs, efficiency, resource use, and production levels.
Production decisions also involve determining for whom goods and services will be produced. The way goods and services are distributed affects who ultimately receives or has access to what an economy produces. Deciding what to produce affects how resources are used. Choices about production methods can also determine what products are made and available.
Every society confronts these three questions, but no single answer applies to all of them. The choices societies make reflect decisions about how to use limited productive resources among competing possibilities.