The basic economics problem

Read more The economic problem All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited. Limited resources Resources are limited in two essential ways: Limited in physical quantity, as in the case of land, which has a finite quantity.

The basic economics problem

The following points highlight the five basic problems of an economy. What to Produce and in What Quantities? How to Produce these Goods? For whom is the Goods Produced?

How Efficiently are the Resources being Utilised? Is the Economy Growing?. The first central problem of an economy is to decide what goods and services are to be produced and in what quantities.

This involves allocation of scarce resources in relation to the composition of total output in the economy. Since resources are scarce, the society has to decide about the goods to be produced: Once the nature of goods to be produced is decided, then their quantities are to be decided.

How many tonnes of wheat, how many televisions, how many million kws of power, how many buildings, etc. Since the resources of the economy are scarce, the problem of the nature of goods and their quantities has to be decided on the basis of priorities or preferences of the society.

If the society gives priority to the production of more consumer goods now, it will have less in the future. A higher priority on capital goods implies less consumer goods now and more in the future. But since resources are scarce, if some goods are produced in larger quantities, some other goods will have to be produced in smaller quantities.

This problem can also be explained with the help of the production possibility curve as shown in Figure 1. Suppose the economy produces capital goods and consumer goods.

In deciding the total output of the economy, the society has to choose that combination of capital goods and consumer goods which is in keeping with its resources. It cannot choose the combination R which is inside the production possibility curve PP1 because it reflects economic inefficiency of the system in the form of unemployment of resources.

The basic economics problem

Nor can it choose the combination R which is outside the current production possibilities of the society. The society lacks the resources to produce this combination of capital goods and consumer goods.

If the society decides to have more capital goods, it will choose combination B; and if it wants more consumer goods, it will choose combination D.

The next basic problem of an economy is to decide about the techniques or methods to be used in order to produce the required goods. This problem is primarily dependent upon the availability of resources within the economy.

If land is available in abundance, it may have extensive cultivation. If land is scarce, intensive methods of cultivation may be used. If labour is in abundance, it may use labour-intensive techniques; while in the case of labour shortage, capital-intensive techniques may be used.

The technique to be used also depends upon the type and quantity of goods to be produced.

The basic economics problem

For producing capital goods and large outputs, complicated and expensive machines and techniques are required. On the other hand, simple consumer goods and small outputs require small and less expensive machines and comparatively simple techniques. Further, it has to be decided what goods and services are to be produced in the public sector and what goods and services in the private sector.

But in choosing between different methods of production, those methods should be adopted which bring about an efficient allocation of resources and increase the overall productivity in the economy. Suppose the economy is producing certain quantities of consumer and capital goods at point A on PP curve in Figure 2.

As a result, the PP0 curve shifts outwards to P1P1. The third basic problem to be decided is the allocation of goods among the members of the society. The allocation of basic consumer goods or necessities and luxuries comforts and among the household takes place on the basis of among the distribution of national income.

Whosoever possesses the means to buy the goods may have then. A rich person may have a large share of the luxuries goods, and a poor person may have more quantities of the basic consumer goods he needs. This problem is illustrated in Figure 3 where the production possibility curve PP shows the combinations of luxuries and necessaries.

This is one of the important basic problems of an economy because having made the three earlier decisions, the society has to see whether the resources it owns are being utilised fully or not. In case the resources of the economy are lying idle, it has to find out ways and means to utilise them fully.

If the idleness of resources, say manpower, land or capital, is due to their male allocation, the society will have to adopt such monetary, fiscal, or physical measures whereby this is corrected. To maintain it at this level, the economy must always be increasing the output of some goods and services by giving up something of others.

Is the Economy Growing?The economic problem – sometimes called basic or central economic problem – asserts that an economy's finite resources are insufficient to satisfy all human wants and needs.

Choice and opportunity cost

It assumes that human wants are unlimited, but the means to satisfy human wants are limited. The third basic problem to be decided is the allocation of goods among the members of the society.

The allocation of basic consumer goods or necessities and luxuries comforts and among the household takes place on the basis of among the distribution of national income.

The basic economic problem arises when wants are unlimited and resources are scarce. Scarcity: Scarcity is the basic economic problem because scarce resources are . The Basic Problem - Scarcity Scarcity, or limited resources, is one of the most basic economic problems we face.

We run into scarcity because while resources are limited, we are a society with. The basic economic problem is scarcity, which is the idea that human beings want more things than are available to them. The economic problem, also known as the central economic problem, describes the relationship between what humans want and what's able to be produced.

The economic problem. All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, alphabetnyc.com economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.

The economic problem