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2. Basic Problems of an Economy

The document outlines the four basic problems of an economy: scarcity of resources, unlimited human wants, alternate uses of resources, and the decisions that arise from these issues. It discusses key economic questions such as what to produce, how to produce, for whom to produce, and the importance of resource efficiency and economic growth. Ultimately, societies must make choices regarding resource allocation to balance current consumption with future growth.

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6 views

2. Basic Problems of an Economy

The document outlines the four basic problems of an economy: scarcity of resources, unlimited human wants, alternate uses of resources, and the decisions that arise from these issues. It discusses key economic questions such as what to produce, how to produce, for whom to produce, and the importance of resource efficiency and economic growth. Ultimately, societies must make choices regarding resource allocation to balance current consumption with future growth.

Uploaded by

travelwithhameed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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The Four Basic Problems of an Economy

The basic problems of an economy are:

1. Scarcity of resources: the resources (i.e. land labour, capital, etc.) are limited in
relation to their demand. If the resources would have been unlimited, there would not
have been any economic problem.

2. Unlimited human wants: the wants of a man are never ending and can never be fully
satisfied. When one want gets satisfied, another want arises.

3. Alternate uses: resources are not only scarce but they also have alternate uses. This
means that they can be put to various uses. Due to this, a choice has to be made
between various uses.

As discussed in the paragraph above, the central economic problem of scarcity of


resources is broken down into five basic problems of an economy. Let’s look at each of
them separately.

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.

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.

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.

4. How efficient the resources are being utilized?

5. 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.

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