UNIT – 1NATURE OF ECONOMIC PROBLEM
, sometimes called the
fundamental economic problem
, is oneof the fundamental economic theories in the operation of any economy. It asserts thatthere is scarcity, that the finite resources available are insufficient to satisfy all humanwants. The problem then becomes how to determine what is to be produced and how thefactors of production (such as capital and labour) are to be allocated. Economics revolvesaround methods and possibilities of solving the economic problem. The economic problem is most simply explained by the question "How do we satisfy unlimited wantswith limited resources?" The premise of the model of the economic problem is thathuman wants are constant and infinite due to the constantly changing demands (oftenclosely related to changing demographics) of the population. However, resources in theworld to satisfy human wants are always limited to the amount of natural resources or human resources (human capital) available. The economic problem, and methods to curbit, revolve around the idea of choice in prioritizing which wants can be fulfilled.
According to Robert Awh, “Economic problem is the problem relating to thenecessity of the choosing what, how and for whom to produce and how to achieveeconomic growth.”
Concepts in the economic problem
While the basic needs of human survival are important in the function of the economy,human wants are the driving force which stimulates demand for goods and services. Inorder to curb the economic problem, economists must classify the nature and differentwants of consumers, as well as prioritize wants and organize production to satisfy asmany wants as possible. One of the assumptions made in economics and the methodswhich attempt to solve the economic problem is that humans are overall greedy, and thusthe market must produce as much as possible to satisfy them. These wants are oftenclassified into
(which depend on the individual preferences and anindividual's purchasing power parity) and
(those of entire communities).Things such as food and clothing can be classified as either wants or needs, depending onwhat type of good and how often.
The economic problem fundamentally revolves around the idea of choice. Due to thelimited resources available, businesses must determine what to produce first to satisfydemand. Consumers are obviously the biggest influences of this choice, as the goodswhich they want must also fit within their budgets and purchasing power parity. Differenteconomic models place choice in different hands. Socialism asserts that (at least) someeconomic choices are best made for the greatest good of society if they are made at thesocietal level for everyone, e.g. via a government agency. Communism takes this further and argues that most or even all major economic choices should be made through central planning by the government. Only by constructing a cohesive plan that takes the good of everyone into account, so the thinking goes, can the best allocation of resources be