Basic Problems Of An Economy: Explanations and Examples

If there is a central economic problem that is present across all countries, without any exception, then it is the problem of scarcity. This problem arises because the resources of all types are limited and have alternative uses. If the resources were unlimited or if a resource only had one single use, then the economic problem would probably not arise. However, be it natural productive resources or man-made capital/consumer goods or money or time, scarcity of resources is the central problem. This central problem gives rise to four basic problems of an economy. In this article, we will look at these basic problems in detail.

The Four Basic Problems of an Economy

As discussed in the paragraph above, the central economic problem of scarcity of resources is broken down into four basic problems of an economy. Let’s look at each of them separately.

Basic Problems of an Economy – #1 – What to Produce?

What does a society do when the resources are limited? It decides which goods/service it wants to produce. Further, it also determines the quantity required. For example, should we produce more guns or more butter? Do we opt for capital goods like machines, equipment, etc. or consumer goods like cell phones, etc.? While it sounds elementary, society must decide the type and quantity of every single good/service to be produced.

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Basic Problems of an Economy – #2 – How to Produce?

The production of a good is possible by various methods. For example, you can produce cotton cloth using handlooms, power looms or automatic looms. While handlooms require more labour, automatic looms need higher power and capital investment.

Hence, society must choose between the techniques to produce the commodity. Similarly, for all goods and/or services, similar decisions are necessary. Further, the choice depends on the availability of different factors of production and their prices. Usually, a society opts for a technique that optimally utilizes its available resources.

Basic Problems of an Economy – #3 – For whom to Produce?

Think about it – can a society satisfy each and every human wants? Certainly not. Therefore, it has to decide on who gets what share of the total output of goods and services produced. In other words, society decides on the distribution of the goods and services among the members of society.

Basic Problems of an Economy – #4 – What provision should be made for economic growth?

Can a society use all its resources for current consumption? Yes, it can. However, it is not likely to do so. The reason is simple. If a society uses all its resources for current consumption, then its production capacity would never increase.

Therefore, the standard of living and the income of a member of the society will remain constant. Subsequently, in the future, the standard of living will decline. Hence, society must decide on the part of the resources that it wants to save for future progress.

basic problems of an economy