The basic or central economic problem asserts that an economys finite resources are

insufficient to satisfy all human wants and needs.

The economic problem states that human wants are unlimited and the
resources required to fulfill them are scarce.
The two key issues are:

Unlimited human wants.

Limited resources to fulfill wants.

Three questions arise from this:

What to produce?
This question lies with selecting the type of supply and the quantity of the supply,
focusing on efficiency.

How to produce?
This question deals with the assets and procedures used while making the product, also
focusing on efficiency.

For Whom to Produce?

This question deals with distributing the goods that have been produced, focusing on
efficiency as well as equity.

Also, there are ten principles of economics:

1)
2)
3)
4)
5)
6)
7)
8)

People face trade-offs.

The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.
Trade can make everyone better off.
Markets are usually a good way to organize economic activity.
Government can sometimes improve market outcomes.
A countrys standard of living depends on its ability to produce goods and
services.
9) Prices rise when government prints too much money.

10) Society faces a short run trade off between Inflation and Unemployment.

The following is an attempt on my part to develop a Grand Economic Theory. The basic
idea is to interchange the two key words unlimited and scarce in the central
economic problem.
The sentence which originally read as, human wants are unlimited and the
resources required to fulfill them are scarce.
Will now read as, human wants are scarce (limited) and the resources
required to fulfill them are unlimited.
The key issues now are:

Unlimited resources to fulfill human wants.

Limited human wants.

For addressing the first problem, let us first consider the consequences if our limited
resources no longer remain limited and can be gotten in an unlimited amount.

i)

Time

Time is a resource all of us fall short of. We all have so much to do that
twenty-four hours in a day seems less than what is required by us. Then, can
unlimited amount of time solve our problem?
Let us take an example:
When given holiday homework, most of the students wait till the
last week of the vacation to complete the homework.
Whenever I used to sit down with my homework during the
beginning of my vacation, I could not bring myself up to
concentrate on it. I always used to feel that lots of time is left to do
my homework and I never completed it before the last few days
before the vacation got over.
So whenever there is a large amount of time to complete any work, human
nature is to tend to postpone it. Hence, if given unlimited time, people will
tend to postpone their work indefinitely. This will result in a loss of efficiency.
Current production will come to a standstill and from the societys point of

view; there will be a stagnant economy which results in a high amount of

inefficiency which is not advisable for any society.

ii)

Labour

iii)

Capital

Labour is defined as the aggregate of all human physical and mental efforts
used in creation of goods and services. Labour too is a very important
resource for any production procedure. Given unlimited amount of labour, we
can do unlimited amount of work. But where do we get labour from? The
source of labor is labourers. To get unlimited amount of labour, we will
require unlimited number of labourers. But all these labourers are human
beings of flesh-and-blood. All of them have their own wants and needs. If the
number of labourers increases to an infinite amount, their wants will increase
by a greater proportion. So, if we achieve unlimited labour, we cannot achieve
a situation of limited human wants. The situation of unlimited labour and
limited resources is self-contradictory, and thus fallacious.

Capital is defined as produced means of production. Factories, machinery

and resources owned by an organization to produce goods consists of capital.
Basically, capital includes all those goods and services which are man-made
and can be further used in the process of production.
Since capital is man-made, there are producers of capital. Now, if we have
unlimited capital, we will have a perfectly elastic supply of capital (i.e., at
some given price, any quantity of capital can be supplied). That will result in a
perfectly horizontal supply curve.

The graph represents quantity on

the X-axis and price on the Y-axis.
Consider a given price P, at which
we have a perfectly elastic supply
curve, S.

Now we define two concepts,

Consumer Surplus It is a measure of the benefit buyers receive from

consuming a particular good, as they themselves perceive. It is measured by
subtracting the price of a good from the amount a buyer is willing to pay for that
good.
Graphically, it can be measured as the area below the demand curve and
above the price.
D

The graph represents quantity on

the X-axis and price on the Y-axis.
D is the demand curve. The area
labeled C.S. measures the
consumer surplus.

C.S.

Producer Surplus It is a measure of the benefits sellers receive from selling a

particular good, as they themselves perceive. It is measured by subtracting a
sellers cost of producing the good from the amount the seller is paid for the good.
(Cost here includes money cost as well as opportunity cost of the producer, such
as the value the producer places on his own time).
Graphically, it can be measured as the area below the price and above the
supply curve.
S
The graph represents quantity on
the X-axis and price on the Y-axis.
S is the supply curve. The area
labeled P.S. measures the producer
surplus.

P
P.S.

Let us consider a normal demand curve of elasticity around unity and a perfectly
elastic supply curve.

The graph represents quantity on the X-axis and

price on the Y-axis. According to the definitions,
the area below the demand curve and above the
supply curve is the consumer surplus. It is
labeled by C.S.

C.S.
P

But there is no space between price and the

supply curve. Thus there is no producer surplus.
So the producers would not get any benefit from
producing capital.
Recalling the ten principles of economics, we
see that the fourth principle was that people
respond to incentives.

But if the producers of capital do not get any benefit from producing capital, they would have no
incentive to produce capital. No incentive will result in no production.
But if capital is not even produced, how can there be unlimited amount of capital? So the
situation of unlimited capital is inconsistent with its consequences.
Hence, having an unlimited amount of capital is not feasible.

Still, if we consider a situation of unlimited resources, we will have a state of the

economy where we can have unlimited production of any good.
Then lets address the issues in an economy:

What to produce?
How to produce?
For whom to produce?

What to produce?
Earlier, the problem of what to produce arose because scarce resources had to be put to
various uses in an optimum amount to produce required amount of every kind of good.
But if we have unlimited resources, this problem will no more exist since every good can
be produced in any amount we want, since there will be no constraint on the amount of
resources.
At the first glance, this will seem as a perfect solution, where everyone will get whatever
they want in whatever amount they wish. But the problem arises when people in a
society have conflicting wants.
Taking a simple example,
Consider a situation where I want to have unlimited amount of holidays,
and I have been given that. I enjoy it and am satisfied. Now suppose I have a
neighbor who is irritated by my mere presence around him. Indeed, he is
not happy about my being around him. He definitely does not want me to
have unlimited holidays. In fact, he would like it if I have unlimited classes
and thus can spend no time around him. This is a situation where both of us
have conflicting wants and we cannot have unlimited amount of what we
wish for at the same time.

The problem here can be called a negative externality on my neighbor, due

to my presence.
An externality is the uncompensated impact of one persons actions on the well-being of
a by-stander. It arises when a person engages in an activity which affects the well-being
of a by-stander but neither receives, nor pays any compensation for that effect.
Externalities can be positive or negative.
When the impact of an action on the by-stander is beneficial, it is called positive
externality and when the impact is adverse, it is called negative externality.
In the present issue that we address, positive externality will cause no trouble but
negative externality can be harmful.
Due to any negative externality, the cost to society (social cost) of any commodity is
larger than the cost to producers (private cost). For each unit of that commodity, the
social cost includes the private cost plus the costs to those by-standers affected
adversely.
Demand
Social Cost
Supply (Private Cost)

QOPTIMUM

QMARKET

The above graph represents quantity on the X-axis and price on the Y-axis. It shows the
effect any negative externality has on a market. We have considered a perfectly elastic
supply curve, due to unlimited production. The social cost lies above the supply curve
and the gap represents the external cost. In this case we see that the market level of
production is more than the optimum level of production. So the amount actually
produced is more than what should be produced for benefit of the society. Thus, due to
the effect of negative externalities, unlimited amount of production of every good is not
beneficial to every person in the society.
Taking another example,
Suppose that we have unlimited car production. This will result in
unlimited number of car factories. These factories will cause pollution. The
level of pollution will rise to an unlimited level. So, there will be a negative

externality on the people around in the form of pollution. Thus society will
not get the benefit of a clean environment. But just as cars are, even a clean
environment is required by the society. So both the goods the society
requires cannot be produced in an unlimited amount simultaneously.
So, unlimited resources and unlimited production, even if feasible, are not advisable
ideas.
How to Produce?
To produce a good, we broadly have two methods of production to choose fromi)
Capital Intensive Techniques
ii)
Labour Intensive Techniques
Since the society has unlimited amount of capital, this capital should be put to use.
Otherwise there will be wastage of resources, resulting in inefficiency which is not
recommended. Thus a good amount of capital intensive production techniques should
be applied.
But as there is unlimited labour, labourers need to be given employment. So, labour
intensive techniques also need to be applied for the well-being of the labourers.
Thus the main issue will be of striking a balance and obtaining an optimum level of
distribution of production work between capital intensive and labour intensive methods,
such that society reaches its maximum level of efficiency.
For Whom To Produce?
Since every good will be produced in an unlimited amount, people will get whatever they
need in whichever amount required. There will be no problem of distribution of the
goods between people. So this problem will not exist.

Now comes the question of Utility.

Utility denotes satisfaction. The satisfaction a consumer derives from consuming a good
can be termed as utility.
Total utility is the sum total of utility derived from the consumption of all units of a
commodity and marginal utility refers to additional utility on account of the
consumption of an additional unit of a commodity.
The relation between the two is that the sum total of marginal utilities adds up to the
total utility.

The law of diminishing marginal utility states that, As more and more units of a
commodity are consumed, the marginal utility derived from every
additional unit must decline.
So, as more amount of a commodity will be consumed, the marginal utility will keep on
decreasing and at a point of time will reach zero, and then onwards will become
negative.
Total utility, being a sum of the marginal utilities will increase at a decreasing rate till it
will reach a maximum when the marginal utility will be zero, then onwards, as the
marginal utility will further decrease, total utility will start decreasing.
Total Utility

Utility

Quantity

Marginal Utility

Utility

Quantity

From the above graph we can see that increasing our amount of consumption will lead
to an increased total utility only to a certain level. After that the total utility will
decrease. So, unlimited consumption will on the whole lead to a decrease in total utility.
Also, more the scarcity of any commodity, more the marginal utility.
Example

Shokaler ghum, if viewed as a commodity, is priceless. That is so, mainly

because it is extremely scarce. Every moment we feel that now we will have
to wake up. So if we can gain even an extra minute of sleep, we value it
much more than what its true value is. So more the scarcity, more the
marginal utility and more the marginal utility, more we enjoy the
commodity. Hence, a scarce amount of sleep will be valued more than
unlimited sleep.
Scarce amount of any commodity, thus, will be valued and enjoyed more than unlimited
amount of it.
So, the idea of unlimited resources is neither feasible, nor advisable.

But one more problem remains, of achieving limited human wants. If that
can be done, every person in the economy can achieve a much higher level,
of satisfaction, and thus be happy. Thus that problem needs to be addressed
now.