The three basic economic questions have to be answered because we human beings have unlimited wants but we only have limited resources with which to try to fulfill those wants. This situation is also known as “scarcity.” Because of scarcity, we have to make choices. Those choices include the three basic economic questions.
Each economy has to decide which things it will produce. No economy has enough resources to produce every kind of good and service that we can imagine. We have to decide, for example, whether we will spend money on manned missions to Mars. We have to decide how many luxury yachts we are going to produce and how many main battle tanks. We do not have enough money, workers, or other resources to produce everything, so we have to decide what things will and will not be produced.
Each economy has to decide how it will produce things. There are typically different ways to produce the same things. For example, we could produce agricultural products using a lot of machinery and only a little bit of human labor or we can produce crops using a great deal of human labor and very little machinery. Each economy has to decide what way of producing things makes more economic sense given the resources that it has.
Finally, each economy has to decide who will get the products that are made because we cannot produce enough for everyone to have everything. We cannot produce enough so that every American can have a luxury yacht, an expensive car, a Rolex, a vacation home in Hawaii, and other things that people might want. Because everyone cannot have everything, choices have to be made. We have to have a way of deciding which people get which goods and services.
All of these choices have to be made because of the basic economic problem of scarcity.