Fundamental economic problems.

Economic problem

The economic problem—sometimes called the basic, central, or fundamental
economic problem—is one of the fundamental economic theoretical principles
in the operation of any economy.

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.

There are several problems in economics. But the main 4 problems are:

1.Scarcity of resource
2.Unlimited wants needs
3.Choice & Opportunity cost &
4.Decision making.

1.Scarcity of resource

The basic economic problem that arises because people have unlimited wants
but resources are limited. Because of scarcity, various economic decisions
must be made to allocate resources efficiently.
Resources are limited in two essential ways:
Limited in physical quantity, as in the case of land, which has a finite
quantity.
Limited in use, as in the case of labour and machinery, which can only be
used for one purpose at any one time.









2.Unlimited wants needs

Needs are material items people need for survival, such as food, clothing,
housing, and ware. Until the Industrial Revolution, the vast majority of
the worlds population struggled for access to basic human needs.

Wants are effective desires for a particular product, or for something
which can only be obtained by working for it. While the fundamental needs
of survival are key in the function of the economy, wants are the driving
force which stimulates demand for goods and services. 

 Things such as food and clothing can be classified as either wants or
needs, depending on what type and how often a good is requested.

3.Choice & Opportunity cost

Choice and opportunity cost are two fundamental concepts in economics.
Given that resources are limited, producers and consumers have to make
choices between competing alternatives. All economic decisions involve
making choices.
Individuals must choose how best to use their skill and effort, firms must
choose how best to use their workers and machinery, and governments must
choose how best to use taxpayer's money.

Making an economic choice creates a sacrifice because alternatives must be
given up, which results in the loss of benefit that the alternative would
have provided. Opportunity cost is the cost of a foregone alternative. For
examples,

Someone gives up going to see a movie to study for a test in order to get a
good grade. The opportunity cost is the cost of the movie and the enjoyment
of seeing it.
 Or if a gardener decides to grow carrots, his or her opportunity cost is
the alternative crop that might have been grown instead (potatoes,
tomatoes, pumpkins, etc.).

Opportunity Costs Including Implicit Costs and Explicit Costs 

In economics, all costs are opportunity costs because resources are scarce
and have alternative uses. The production possibilities frontier show that
if resources are used to produce one good, they are not available to
produce other goods. The economic cost of producing additional units of one
good is therefore the alternative cost, that must be forgone in order to
produce those additional units. This notion of opportunity cost is directly
applicable to the individual firm.

Economists generally divide economic costs or opportunity costs into two
groups, 
Explicit costs and Implicit costs.

OpportunityCosts =ExplicitCosts +ImplicitCosts

In the graph below, the two items are food and computers. As we can see, in
order to increase the number of computers the individual wants, the
individual must give up a certain amount of food. The amount of food that
the individual gives up is the opportunity cost of getting more computers.





An analytical tool for addressing these problems is the production-
possibility frontier (PPF).

In the simplest case an economy can produce just two goods. Then the PPF is
a table or graph (as below) that shows the different quantities of the two
goods. Technology and an endowment of productive inputs (such as land,
capital, and prospective labor) are taken as given, which limits feasible
total output.
Point A in the diagram for example, shows that FA of food and CA of
computers can be produced when production is run efficiently. So can FB of
food and CB of computers (point B). Each point on the curve shows a
maximal potential total output for the economy, which is the maximum output
of one good, given a feasible output quantity of the other good.





4.Decision making or Samuelson's three questions
America's first Nobel Prize winner for economics, the late Paul Samuelson,
is often credited with providing the first clear and simple explanation of
the economic problem - namely, decision making.

1. What to produce? (Allocative decision)
There are two aspects of this problem— firstly, which goods should be
produced, and secondly, what should be the quantities of the goods that are
to be produced.

The first problem relates to the goods which are to be produced. In other
words, what goods should be produced? An economy wants many things but all
these cannot be produced with the available resources.

Therefore, an economy has to choose what goods should be produced and what
goods should not be. In other words , whether consumer goods should be
produced or producer goods or whether general goods should be produced or
capital goods or whether civil goods should be produced or defense goods.

The second problem is what should be the quantities of the goods that are
to be produced.

Production of goods depends upon the use of resources. Hence, this problem
is the problem of allocation of resources. If we allocate more resources
for the production of one commodity, the resources for the production of
other commodities would be less.

2. How to produce? (Productive decision)

The second basic problem is which technique should be used for the
production of given commodities.

This problem arises because there are various techniques available for the
production of a commodity such as, for the production of wheat, we may use
either more of labour and less of capital or less of labour or more of
capital. With the help of both these techniques, we can produce equal
amount of wheat. Such possibilities exist relating to the production of
other commodities also.

Therefore, every economy faces the problem as to how resources should be
combined for the production of a given commodity. The goods would be
produced employing those methods and techniques, whereby the output may be
the maximum and cost of production be the minimum.
Broadly speaking, there arc two techniques of production-labor-intensive
technique and capital-intensive technique. Labor-intensive technique
involves greater use of labor and capital-intensive technique involves
greater use of capital. Because of abundance of labor India would prefer
labor-intensive technique. Similarly, America will use capital-intensive
technique because of abundance of capital.

3. For whom to produce? (Distributive decision)

The main objective of producing a commodity in a country is its consumption
by the people of the country. However, even after employing all the
resources of a country, it is not possible to produce all the commodities
which are required by the people. Therefore, an economy has to decide as to
for whom goods should be produced.

This problem is the problem of distribution of produced goods and
services. Therefore, what goods should be consumed and by whom depends on
how national product is distributed among various people.


All the three central problems arise because resources are scarce. Had
resources been unlimited, these problems would not have arisen. For
example, in the event of resources being unlimited, we could have produced
each and every thing we had wanted, we could have used any technique and we
could have produced for each and everybody.
Besides, what, how and for whom there are three more problems which are
also regarded as basic problems.