Any individual related to business has to think about some questions before coming to market or business world. In the business world, one has to answer some economic questions. These economic questions are an economic problem.
The Economic Problem
Suppose you are in the market. You have seen that there are shops in which there are countless customers. There are also shops without any customers. Does it ever come to your mind the reason behind this? It may be the bad behaviour of the shopkeeper.
Apart from this, what would be the possible reasons? There are so many reasons for this. Some of them are the availability of the items or the products needed, their varieties, ease of availability etc.
These are some of the economic problems. A producer has to go through these. He needs to find solutions for the economic problem. Let us study the economic problem in details.
Browse more Topics under Fundamentals Of Economics
- Definitions of Economics
- Nature of Economics
- Scope of Economics
- Capitalist Economy
- Socialist Economy
- Mixed Economy
- Business Cycles
A consumer will have some needs and wants. Sometimes there is a surplus of the services. Sometimes there is a scarcity of the services or the products. Production, distribution, and nature of goods and services are the basic economic activities.
To avoid the economic problem one has to decide how to allocate the scarce resource. One has to understand how to achieve efficiency with the existing resources Also, one has to understand that some resources are limited. One always has to deal with the scarcity and the choices. Basically one always has to decide
- What goods and services to produce.
- Nature of the goods to produce.
- Preferences and priorities of the goods.
- How to produce the best services.
- For whom to produce these services.
Type of Economic Problem
The available finite resources are insufficient to satisfy all human wants. Depending upon the above points there are basically three types of economic problem. They are
- What to produce.
- How to produce.
- For whom to produce.
Before understanding these economic problems, let us first understand what an economic resource is.
Economic resources are the factors of production that are used to produce goods or services. The various types of economic resources are
Land: All the natural resources for producing goods and services. For example rivers, forests, minerals etc.
Labour: The physical and mental contribution of any human towards production. For example labourers, workers, etc.
Capital: Man-made resources used for producing goods and services. For example, machinery, buildings, computers, etc.
Entrepreneur: Any person who takes the risk by employing other resources to produce goods and services. For example, a businessman, head of the shop, head of the factory etc.
Central Problems of an Economy
What to produce
The first central problem of an economy is to decide what goods and services need to be produced. Also, one has to decide the quantities of production. It involves the allocation of resources.
First one has to decide the nature of the goods to produce it. Once it is done, the quantity is decided. This decision is based on the preference and priorities of society. A higher priority on capital goods implies fewer consumer goods now and more in the future.
How to produce
The second central problem of an economy is to decide how to produce these goods. First one needs to decide the nature and the quantities. After that one has to decide the techniques or the methods of producing these goods.
It depends upon the availability of resources within the economy. Choice of techniques and methods of producing goods must bring an efficient allocation of resources. It must also bring the overall productivity in the economy.
For whom to produce
The third central problem of an economy is to decide for whom to produce these goods. In other words, one can say it is the decision of the allocation of goods among the members of society.
Distribution of income determines who will be getting what. A rich person may have a large share of the luxuries. The poor person will have basic goods. It depends on the principle of efficiency and equity.
Solved Example on Economic Problem
Question: Are needs and wants different? How?
Solution: Yes, needs and wants are different. Needs are the necessities of life. For example food, clothes, shelter, warmth etc. Things that make our life enjoyable and comfortable are the wants. For example, Cars, toasters, A.C., ornaments etc.