Optimal decisions are made at the margin. Individuals make choices that maximize their own welfare/utility/happiness. Governments make decisions that maximize the welfare of society. The economic problem how to use our limited resources to satisfy our unlimited wants and needs to the greatest extent. What goods and services will be produced. How will the goods and services be produced. Who will receive the goods and services produced. The cost in terms of the most valuable alternative that is sacrificed. Spending limited resources on a selection of wants and needs. Centrally planned economy government decides how economic resources will be allocated. Market economy an economy in which the decisions of households and firms interacting in markets determine the allocation of economic resources. Productive efficiency situation in which a good or services is produced using the least amount of resources. Allocate efficiency state of the economy in which production reflects consumer preferences.