All economies are usually faced with basic economic problems that have to do with production, distribution and consumption in the economy. The basic economic problems arise as a result of resources that are relatively scarce when compared with the objectives for which they should be used. Human wants are infinite and the resources are limited.
1. Human resources
2. Natural (physical) resources.
As said earlier, there arises the need to make choices as a result of the limited resources (scarcity) which individual intends to maximize. There is the need to strike a balance between scarce resources and unlimited and insatiable human wants. Consequently, decision making on choices assist individual, businesses and government to allocate scarce resources efficiently. These problems led to the basic economics problems which must be answered.
Overview of Basic Economic Problems
Human wants are unlimited and ever dynamic due to ever changing demands
and needs for resources which are limited. Therefore, in resolving the economic
problems, the method of solving it spin round prioritization of choices in
order to know most pressing of the objectives and which ones to be solved
first. Knowing which want can be accomplished and why and how it should be
accomplished, when it should be accomplished and where it should be
accomplished leads us to correct way of fulfilling the wants with the
relatively scarce resources.
This is because, human wants drives the economy through the demand and supply of goods and services to be used in realization of differing objectives of individual, businesses and the government. For instance, house is a necessity not a luxury; having access to good shelter is of utmost important. House and other needs are fulfilled by patronizing the product markets. Product markets obtain the needed factors of production from the factor markets after decision on basic economic problems had been answered. In Nigeria, most people are conversant with buying a land and then developing it into a house by themselves.
Meanwhile, in the United State of America (U.S.A), it is a common practice
to buy a house. Figure 1.1 shows a graph of real income (money available for
consumption) and the price of getting a house in the U.S.A. The resources (real
incomes) to satisfy human want (house) have been falling according to the graph
since 1970. In contrast, home prices have been sky rocketing since 2002 such
that the real wages is far below the house prices. This is an example of the
most basic economic problem.
Real Income and House Prices
Source:
The problems such as stated in Figure 1.2 on basic economic
problems and product market are discussed in the following section.
Product Market and Basic Economic Problems
• What to
produce?
• How much to
produce?
• How to produce?
• For whom to
produce?
• When to
produce?
What to Produce?
What to produce - thorough evaluation and rating of goods and
services from most valued to least valued is a required step in arriving at a decision
of what to produce. This is a vital stride to support the assumption that there
is usually a trade-off between the choices and because of the comparability of
different things that we valued.
How much to Produce?
How much to produce- since there are different goods and services
in the marketplace competing, there is the need to determine how much of the
goods or services of our choice we should produce. Demand for comparable goods
or services may affect the decision making process on how much to produce. If
the decision on how much to produce shows that large quantity should be
produced then cost and benefit of large scale production may as well influence
the decision on how to produce?
How to Produce?
How to produce-there are different methodologies for production of goods, if the
decision on how much to produce shows a large quantity it may influence the
method of production to be adopted. There are other factors that may affect the
decision on how to produce such as availability of raw material.
For whom to Produce?
For whom to produce- this is shaped by the principles governing how
goods are distributed among the members of a society. The distribution method
may modify incentives that influence the behavior of individuals.
When to Produce?
When to produce- The timing of production and the time that the
final output of a good (or service) is available in the market may affect its value.
By and large, goods to be consumed at some future date are perceived to have
relatively lower value than those available currently for consumption. More so,
producers of seasonal goods must have their new equipment and input materials
ready for the next season.
Conclusion
Economics is a social science that studies the relationship
between scarce resources and the process of allocating them in order to satisfy
unlimited wants. It studies how individuals, businesses and government goes
through process of decision making in order to get most benefit from their
choice having compare the cost and benefit before taken a decision. This
decision is deemed rational in as much as it the act is influential to
achieving some well-defined end. It also studies how decisions of individual,
businesses and government on wealth creation through production of goods and
services, their distributions as well as consumption affect our day-to-day
activities and the overall economy.
Fundamentally in economics, there are concept such as choices, opportunity cost, rationality and reaction of people to incentives. Given that all actions has an alternative, for each objective that people have, they must go through decision making process to select the best or correct way to maximize the benefit from their choice. Aside the out-of pocket expense which is the cost price for a particular choice, other cost that are implicit which is chiefly the best alternative that was forgone must be included in the cost of the choice made. Changes in cost or benefit somehow affect the decision making. Choosing the correct way to achieving an objective allows us to be able to predict human behaviour while their mistake may not be easily predictable. Consequently not all decisions are rational.
Also read on << Fundamental Principles of Economics >>
Also read on: << what is Economics? >>
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