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The Basic Economic Problem

The existence of scarcity creates the basic economic problem faced by every society, rich or poor: how to make the best use of limited productive resources to satisfy human needs and wants.

To solve this basic problem, every society must answer these three basic questions:

 

What and how much to produce?

Every society must decide on what goods it will produce are and how much of these it will produce. In this process, the crucial decisions include:

  • Whether to produce more of food, clothing and housing or to have more luxury goods
  •  Whether to have more agricultural goods or to have industrial goods and services
  • Whether to use more resources in education and health or to use more resources in military services
  • Whether to have more consumption goods or to have investment goods 
  • Whether to spend more on basic education or higher education

 

How to Produce?

Every society has to decide whether it will use labour-intensive technology on capital intensive technology; that is whether to use more labour and less more machines and vice versa.

 

For whom to produce?

Every society must also decide how its produce be distributed among the different sections of the society. It must also decide who gets more and who gets less. It should also decide whether or not a minimum amount of consumption be ensured for everyone in the society. Due to the scarcity of resources, a society faces the compulsion of making choice among alternatives. It faces the problem of allocating the scare resources to the production of different possible goods and services and of distributing the produced goods and services among individuals within the economy.

 

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