Society has to decide which commodities to make. We have to decide how to make those commodities. The opportunity cost principle states the cost of one good in terms of the next best alternative. For example, a gardener decides to grow carrots on his allotment. Further examples are given in Table 1.2.
Different countries have different methods of tackling the economic problem.
There are three main types of economy. A market or capitalist economy is where resources are allocated by prices without government intervention. The USA and Hong Kong are new examples of market economies where firms decide the type and quantity of goods to be made in response to consumers. An increase in the price of one good encourages producers to switch resources into the production of that commodity. Consumers decide the type and quantity of goods to be bought.