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fundamental economic theories in the operation of any economy. It asserts that there is scarcity, that the finite resources available are insufficient to satisfy all human wants. The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labour) are to be allocated. Economics revolves around methods and possibilities of solving the economic problem. The economic problem is most simply explained by the question "How do we satisfy unlimited wants with limited resources?" The premise of the model of the economic problem is that human wants are constant and infinite due to the constantly changing demands (often closely related to changing demographics) of the population. However, resources in the world 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 curb it, revolve around the idea of choice in prioritizing which wants can be fulfilled.
According to Robert Awh, “Economic problem is the problem relating to the necessity of the choosing what, how and for whom to produce and how to achieve economic 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. In order to curb the economic problem, economists must classify the nature and different wants of consumers, as well as prioritize wants and organize production to satisfy as many wants as possible. One of the assumptions made in economics and the methods which attempt to solve the economic problem is that humans are overall greedy, and thus the market must produce as much as possible to satisfy them. These wants are often classified into individual wants (which depend on the individual preferences and an individual's purchasing power parity) and collective wants (those of entire communities). Things such as food and clothing can be classified as either wants or needs, depending on what type of good and how often.
The economic problem fundamentally revolves around the idea of choice. Due to the limited resources available, businesses must determine what to produce first to satisfy demand. Consumers are obviously the biggest influences of this choice, as the goods which they want must also fit within their budgets and purchasing power parity. Different economic models place choice in different hands. Socialism asserts that (at least) some economic choices are best made for the greatest good of society if they are made at the societal 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
achieved. Capitalism argues for a more laissez-faire approach, wherein the role of the government is to protect the property rights of individuals and companies so that they can have the confidence to undertake the economic activity (and risks) that will create the most value. In a free-market economy without the constraints of government wage and price controls, proponents of market capitalism argue, resources are automatically allocated toward the things that society, collectively, values most. If a good or service is overvalued (i.e., the price is too high), the surplus will force providers of the good or service to lower their prices or to re-allocate their capacity to produce something more worthwhile. If the supply of a good or service is inadequate, rising prices increase the value and so cause more production capacity to be directed toward the item. Adam Smith's The Wealth of Nations has been an extremely influential book for this school of thought. Causes of Economic Problem: 1. Unlimited wants: Human wants that can be satisfied by consuming goods and services and unlimited. No individual can fully satisfied his wants. Wants of all the members of society cannot be fully satisfied in a given time. In reality, human wants have been multiplying day in and day out. It is therefore, be said that at any given time there do exist innumerable unsatisfied wants in a community. Example want to Home theatre systems, deluxe cars, LCD TV. 2. Limited Needs: Large numbers of goods and services are needed to satisfy human wants. To satisfy hunger one needs bread, fruit or milk. Accordingly goods and services satisfying human wants are divided into two parts: a) Free goods One has not to pay any price to get these goods and services. Example air, sunshine etc. b) Economic goods: One has to pay price to get economic goods and services. They are also called as scares means. Example bread, fruit or services doctor and lawyers etc.
The means to satisfy wants are classified into four categories: A. Land referes to all those natural resources which are free gift of nautre. Example land, minearls, forest etc. B. Labour referest oa ll thoes physical and mental activiites which are used in the prodution of goods and services. Example service of a domestic servant or of an engineer. C. Capital referes to the man made means of production. Example machines, tools etc. D. Enterprise refers to risk taking and conducting of business of an entrepreneur as a result of which it becomes possible to organize production. All the factors of production that is land, labour, capital and entrepreneur are scarece. It means there supply is not unlimited but some price has to be paid for their availablity. Scarcity is the root cause of economic problem.
Another peculiarity of means of production is that they have alternative uses. Example timber used for making furniture, sport goods etc. it is because of alternative uses of means that a problem of choice arises. In order to gain one alternative the other alternative that we forego is the opportunity cost of gained alternative. In short, scarcity of means and their alternative uses are main cause of origin of economic problem. CENTRAL ECONOMIC PROBLEMS OF AN ECONOMIC SYSTEM: Following are the main central economic problem: 1. What to produce and how much to produce? First problem that every economy faces is what goods and services be produced with the scarce resources so that maximum wants of the people are satisfied. The main cause that gives rise to this problem is that resources are scarce in relation to their wants. In fact, it is the problem of allocation of scarce resources. The allocation of scarce resources among alternative uses is called resource allocation. Every economy has to make a choice as to what wants can be satisfied and what can be foregone. In other words, for a rational allocation of resources a society must set priorities among their needs. Wants which are decided to be satisfied call for two more decisions: a) What goods and services are to be produced? Which of the consumer goods like sugar, cloth, vegetable oil etc. are to be produced and which of the goods like machines, tractors etc. are to be produced? If the economy aims at satisfying present wants, then more of consumer goods will be produced. On the contrary, if the economy aims at increasing present production capacity to satisfy more wants in future, then stress will be laid on the production of capital goods. b) How much to produce? When an economy decides about the goods and services it is to produce, it alos decides about the quantity of the same to be produced. How much quantity of consumer goods and how much of capital goods be produced? This decision requires information regarding production possibility of different commodities with the given resources. Such information can be summarized in the production possibility curve. 2. How to produce? This problem is based on the first problem itself. Having decided what to produce and how much to produce, the next decision relates to how to produce. This problem is concerned with the choice of technique. Three questions arises in this context:
a) How to make use of resources in the production of those goods and services which are wanted by the people and how to prevent the use of resources in producing those goods and services which are not wanted by the people. b) Economy is also to ensure that those firms, which are producing such goods and services, as are decided to be produced must get the relevant resources to produce them, in ample measure. In other words, economy producing wheat and cloth must select such farmers and firms as are willing to produce these goods. These farmers and firms must be amply provided with those means of production, which are essential for the production of these tow goods. c) The economy will also have to determine the most efficient combination of the resources required for the production of a given level of output of goods decided to be produced. In other words, it will have to decide on the most appropriate technology to be adopted. This problem also arises because of the scarcity of means of production. Had mean of production been available in plenty then any technology could have been adopted. But in different economies different types of means are scarce. That is why different economies adopt different technology. 3. For whom to produce? This problem deals with the question as to how an economy distributes its total production among different economic units. How consumer goods be distributed in the household sector or among different consumers of the economy. In other words, how much share out of total production or national income be given to each factor of production, that is, wages to laborers, interest to capitalist, rent to landlord and profit to the entrepreneur. 4. How to achieve fuller utilization of resources? In the problem an economy has to decide the extent to which it is willing to utilize its resources. For instance, if the economy makes large-scale exploitation of its mineral resources like coal, iron, petroleum etc. in the present then the availability of these resources in the future will go down. So every economy has to decide about the scale of utilization of its resources. Having decided about the level of utilization of its resources, the economy makes a determined bid to remove involuntary unemployment as well as excess capacity. 5. How to achieve efficiency I production and distribution? According to Pareto, “efficient production refers to a situation in which production of good cannot be increased unless production of another good is decreased. Similarly, efficient distribution refers to
a situation in which consumption of an individual cannot be increased unless consumption of another individual is decreased. 6. How to accelerate economic growth? This problem refers to the problem of economic growth. Every economy is keen to raise the standard of living of its people. In under developed countries it is possible only by breaking the vicious circle of poverty and raising the level of savings, investment or the rate of capital formation. To increase the rate of economic growth in a country, its social and institutional factors like, ownership of means of production, land reforms and techniques of production must undergo a radical change ****************.