From Wikiversity
Jump to navigation Jump to search
Subject classification: this is an economics resource.

The Basic Economic Problem[edit | edit source]

"Economics is the study of the division of scarce resources between unlimited needs and wants"

Let us explain further. You are the head of your household. There are several things which are needed to keep the household running, e.g. food, electricity, gas and so forth. There are also wants, which may not have to be fulfilled per se, but will be acquired somehow.

A store manager has a limited budget to spend on various wants, his resources are scarce. He could spend his money on providing more staff, bringing in more stock from a wholesaler, marketing his product to increase demand through advertising, decorating or improving his store and paying for essential services like water and electricity. Effectively he has unlimited wants but limited means or resources. We say that his resources are scarce. The store manager must economise by choosing to use his resources to satisfy certain wants such as marketing instead of others like stock purchase. As earlier stated, economics is the study of the division of these resources to best satisfy the unlimited wants.

Every economy in the world face three main basic economics problems because the needs and wants of the society are unlimited but the resources available to satisfy those are limited. Whether a country is rich or poor this is a common situation to all of them. The main economics problem are:

  1. What to Produce in which quantities?
  2. How to Produce?
  3. For whom to Produce?

Lets look at the problems in details.

What to produce ?[edit | edit source]

In any society there are unlimited wants but resources are limited or resources are scarce. And these resources have alternative uses. Due to this each society has to decide what they are to produce using these scarce resources. So each economy has to make choice by thinking what kind of products or what quantity is to be produced. For example an economy has to decide whether to produce more services such as transport or hospitals, or consumable goods like more clothes and houses or more capital goods such as roads, buildings etc. The economy must decide which goods and services to produce and which goods and services to exclude from production is the problem of choice between commodities. Note that the decision of what to produce is made, having the consumers preferences in mind.

How to produce?[edit | edit source]

The problem of ‘how to produce’ means which combination of resources is to be used for the production-of goods and which technology is to be made use of in production. Once the society has decided what goods and services are to be produced and in what quantities, it must then decide how these goods shall be produced. There are various alternative methods of producing a good and the economy has to choose among them. For example, cloth can be produced either with automatic looms or power looms. Fields can be irrigated (and hence wheat can be produced) by building small irrigation works like tube-wells and tanks or by building large canals and dams. Therefore, the economy has to decide whether cloth is to be produced by power looms or automatic looms. Similarly, it has to decide if the irrigation has to be done by minor irrigation works or by major works. So Obviously, it is a problem of the choice of production

For whom to produce?[edit | edit source]

Once an economy has produced goods and services, it also has to decide who will consume those goods. This will be decided by different way by the nature of the economy.

Though the above three problem are common to each economy, an economy can take different approaches to solve these basic economics problems, and depending on the approach economies are organised in different way. This is why we find different economies such as market economy, centrally planned economy and mixed economy and so forth.

Another Perspective[edit | edit source]

Think about why you get up in the morning.

What motivates you to get out of bed? Eat food? Work? Dance? Make friends? Fear of starvation, failure or ridicule?

We are concerned with both the value of doing any given thing as well as the value of not doing any given thing (known hereafter as opportunity cost). Economics comes down to one idea, happiness.

Economics is the quantitative and eventual qualitative description of every human activity in our world. By studying economics you are analysing rational behavior to a higher degree than the level that we live by in our daily lives.

See also[edit | edit source]