Basic Problems of an Economy

BASIC PROBLEMS OF AN ECONOMY

  • Economic problem: The problem of allocating limited resources for the production of alternative goods and services, essentially a problem of choice.
  • Law of scarcity: Goods are scarce because there aren't enough resources to produce all the goods people want, implying the need to make choices and give up one thing for another.
  • Economic problem is a problem of relative scarcity and choice.

WHY ECONOMIC PROBLEMS ARISE?

  1. Unlimited Wants: People have unlimited desires for goods and services, differing in urgency and leading to a scale of preferences.
  2. Limited Resources: Resources available to satisfy human wants are limited, including Land, Labour, Capital, and Entrepreneurship. No society has enough productive resources to fully satisfy all wants.
  3. Resources Have Alternative Uses: Resources can be used for different purposes. With limited resources comes the problem of deciding how many of each commodity should be produced. i.e., a piece of land can be used to produce wheat, vegetables, or any form of construction etc.
  • Economizing of resources: Allocating available resources among different uses to ensure they are put to their best possible use.

CENTRAL PROBLEMS OF AN ECONOMY

  • Basic problems are common to all economies, whether Capitalist, Socialist, or Mixed.

BASIC ECONOMIC QUESTIONS (FUNDAMENTAL PROBLEMS)

  1. What to Produce and How much to Produce?
  2. How to Produce?
  3. For Whom to Produce?
1. WHAT TO PRODUCE AND IN WHAT QUANTITIES?
  • Resources are scarce, so a society cannot produce all the goods and services it wants.
  • The fundamental task of an economy is to decide which commodities to produce and in what quantities.
  • The problem of what to produce is a problem of resource allocation.
  • What commodities are produced in an economy depends on the pattern of demand and resource availability.
2. HOW TO PRODUCE?
  • This problem deals with the technique of production.
  • There are two types of techniques:
    • Labour intensive
    • Capital intensive
  • Two determinants of the types of techniques to be used:
    • The level of technical knowledge available in the economy.
    • The relative availability of different types of resources.
3. FOR WHOM TO PRODUCE?
  • This problem deals with the distribution of the total output of goods and services among the members of an economy.
  • Goods and services would be acquired by those who can pay for them.
  • National income is distributed among various productive resources in the form of factor incomes such as wages, interest, rent, etc.

OTHER CENTRAL PROBLEMS

(a) Problem of fuller utilization of resources.

(b) Problem of efficiency in utilization of resources.

(c) Problem of economic growth.

(a) Problem of fuller utilization of resources:
  • As sufficient amount of resources are not available in an economy to produce all the commodities it requires, one of the problems every economy would like to tackle is how to make optimum utilization of resources such that resources are not left idle or unemployed.
(b) Problem of efficiency in utilization of resources:
  • Resources are efficiently utilized if their allocation produces the maximum output.
  • The economy is said to be producing efficiently when it cannot produce more of one good without producing less of another good.
  • Efficiency also means that the resources are put to their best possible use.
(c) Problem of economic growth:
  • Economic growth is identified by the quantitative increase in the output of an economy.
  • Every economy wants to increase its production capacity so as to increase its national income and per capita income.
  • All the economies are engaged in the task of increasing their resources along with an increase in the efficiency of resources.