What are the basic economic problems?

 

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.

Basically, the resources can be categorized into two:

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

The fundamental economic problem is the issue of scarcity and how best to produce and distribute these scare resources. 

Scarcity means there is a finite supply of goods and raw materials. 

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.

Read On: What are the basic economic problems?

The Basic Economic Problems

The fundamental economic problem is the issue of scarcity and how best to produce and distribute these scare resources. Scarcity means there is a finite supply of goods and raw materials. 

The following are the basic economic problems of the society:

1. What to produce?

2. How much to produce?

3. How to produce?

4. For whom to produce?

5. When to produce?

 

1. 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.

2. 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?

 

3. 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.

 

4. 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.

 

5. 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 on the basic economic problems

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 behavior while their mistake may not be easily predictable. Consequently not all decisions are rational.