Basic and Central Problems of an Economy

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Economics is the study of the economic behavior of individuals living in societies. While individuals living their daily life, they connect to one another in different forms and different situations. Having a connection between different individuals, societies, states, nations, regions there emerge diverse economic issues.

The common feature of all these issues is the economic problem. Thus, it is the economic problem that lies at the root of the problems of the economy. Various basic and central problems of an economy (central economic problems) and their dimensions can be briefly discussed as below;

The Economic Problem and its Nature

Desire and wants of individuals are unlimited and mean to tackle such unlimited wants are always limited. The total amount of commodities or goods and services produced by employing all the productive resources of an economy are insufficient to satisfy all the wants of the people.

So human wants are almost every time exceed the number of resources that they have. We call such a situation scarcity. Scarcity is the vital and ultimate problem of each society. People all the time face scarcity of goods and income. The reason behind all the economic problems that are to be faced by individuals, and by nations is that none of us can have all that wants we want. This situation is known as scarcity.

So, we are living in the world of scarcity. Economic scarcity refers to the basic fact of life that there exists a limited amount of human and non-human resources due to which it is not possible to produce an unlimited amount of economic output and economic growth.  

Hence, every time every economic agent has to take the basic decision of making the best use of available resources in producing various goods and services. The economic problem therefore can be defined as the problem regarding the allocation of limited resources for the production of alternative goods and services. In a single line economic problem is the problem of choice.

The economic problem and its nature
The Economic Problem and its Nature

Resources are scarce and they have alternative usages so that there arises the problem of choice regarding the use of these resources. This scarcity has always been with us and will be with us till eternity. Scarcity occurs among poor people as well as among rich people. It applies to everyone and every nation because there will never be enough of everyone that people want to have.

Reasons Behind the Emergence of Economic Problems

The problem of choice is the central problem of the economy. The problem of choice (economic problem) arises because of the following causes;

Unlimited Wants

The chief fact relating to human wants is unlimited wants. Human wants are multiple and they increase over time. Many of the wants keep recurring. In case of urgency, the preferences may change.

Limited Resources

Society has resources like land, labor, capital, equipment, and entrepreneurial ability and skills. Such are known as factors of production. These productive resources are always available in a limited volume. Labor is limited by the size of the population, land is limited by the area of the country, capital and technology are limited by the scarcity of various inputs required for their production and limited knowledge.

Resources have Alternative Uses

Resources can be used alternatively. This suggests that with inadequate resources of factors and having their alternate usages, the economy might choose to yield or manufacture a higher quantity of some merchandise and less quantity of the other merchandise.

Thus, economic problems arise from the scarcity of resources relative to human wants. The economic problem would not arise if wants are limited or if the resources were available in an unlimited amount. But in realism, it is not the circumstance. We have unlimited wants and limited resources to chase them.  

Best use of available resources to maximize output, maximize satisfaction is always a major concern of economics and solution to economic problems.

List of the Basic and Central Problems of an Economy

The central or common problems that existed in all types of economies are called basic or central problems of the economy. These are seen in capitalist, socialistic, and even in Robinson Crusoe economy.  The list of such central problems can be presented as;

What to Produce and How Much to Produce?

It is the problem of determining the optimum quantity of production. If we decide which commodities are to be produced then we also have to decide how much to produce.

It may be the choice between the production of consumer and capital goods or one consumer goods and another and so on. These problems are known as resource allocation problems. Such allocation is secondarily affected by the availability of resources and primarily by what pattern of demand is there in the market.  

How to Produce?

This problem concerns the choice of method or techniques of production to use. There are basically two types of techniques as labor-intensive and capital-intensive. The selection of techniques of production is based on two factors.

The first one is the availability of resources. If resources are available in plenty of volumes then any technique could be applied. But labor surplus economies are seen as the use of labor-intensive compared to labor-scarce economies. Second is the level of knowledge available in the economy.

For Whom to Produce?

This is related to the distribution of output produced. The distribution of goods and services produced in the economy is directly determined by the distribution of income in the economy or societies.

The Problem of Fuller Utilization of Resources

Resources are always limited so having unused productive resources is a loss of opportunities. It means the non-utilization of productive resources is undesirable. But most of the economies are facing the problem of unemployment of resources. Lack of full utilization of either resource is another central problem of all economies but is more common in developing economies.

The Problem of Efficiency in the Utilization of Resources

Efficiency in the use of resources is also another problem of the economy. It refers to avoiding the wastage of resources. In economics efficient utilization of resources means a trade-off between the use of resources to alter the possible best outcome. Efficiency ensures that resources are put in their possible best usages. it can be considered as the ideal situation that all the economies want to achieve.

The Problem of Economic Growth

It is the issue relating to a sustained increase in the productive capacity of the economy. The productive capacity is based on the number of resources and efficiency. The increasing availability of resources and efficiency will increase the growth of the economy. Hence all the economies want to do both.

Thus, every economy faces various such basic and central problems as discussed above. These problems could be represented as a problem of resource allocation, utilization of resources, and growth of resources. Such problems are common to all types of economies.

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