NAME: JULIANA MUTETI

REG NO: HDB211-0079/2019

UNIT NAME: INTRODUCTION TO MICROECONOMICS
UNIT CODE: HBC 2104
GROUP: N
An economizing problem is a situation which arises when individual’s wants are unlimited when
resources which are available to satisfy them are scarce. The economic problem exists because of
scarcity, which refers to the situation where there are no sufficient resources to produce the
goods and services that can meet the unlimited human wants and needs. Scarcity exists because:
1.There are unlimited human wants which are insatiable
2.There are limited resources available to produce goods and services to satisfy our needs.
Scarcity brings about the question of how resources are allocated and the effects of allocation of
various economic agents. There are two categories of resources; Human resources (labor and
entrepreneurial ability) and property resources (land, raw materials and capital). Land means all
gifts of nature such as forests, mineral and oil deposits and water resources. The factor payment
for land is rent. Capital includes all manufactured aids used in producing consumer goods and
services e.g. tools, machinery and equipment. The factor payment for capital is interest. Labor is
the physical and mental talents of individuals available and usable in producing goods and
services. The factor payment for labor is salaries and wages. Entrepreneurial ability is the special
human resource distinct from labor. An entrepreneur takes the initiative of combining the
resources of land, capital and labor to produce a good or service.
REASONS WHY THERE EXISTS AN ECONOMIZING PROBLEM.
There is an economizing problem because there are: a)
Unlimited wants.
b) Limited resources.
c)Alternative use of resources.
a) UNLIMITED WANTS.
Human wants are unlimited in numbers. There is no end of human wants. Whenever one want is
satisfied, automatically the other wants crop up and this goes on and on. There are several wants
which are recurring in nature like food, clothes etc. Moreover, human wants are increasing day
by day with the development of education, knowledge and civilization. Also, the satisfaction of
certain wants tends to trigger others; the acquisition of Neon or Civic has been known to whet
the appetite for Porsche or a Mercedes. Our desires for goods and services can’t be completely
satisfied. Our desires for a particular good or service can be satisfied over a short period of time.
The objective of all economic activities is to fulfil wants.
b) LIMITED RESOURCES.
In economics, scarcity means that commodities and resources to produce goods and services are
less in relation to their demand. Goods and services that satisfy are produced with the help of
resources such as land, labor, capital and enterprise. These resources are scarce while wants are
unlimited. Due to scarcity of these resources an economy cannot produce all that goods and
services as required by citizens. Consequently, some wants remain unsatisfied.
c)ALTERNATIVE USE OF RESOURCES.
Means are not only limited but also have alternative uses e.g. electricity can be used for lighting
lamps or for cooking food or for operating TV, fridge, music system etc. Similarly, there are
many resources which have got their alternative uses. This characteristic makes resources scarce.
Thus, every economy has to choose better alternative uses of resources to which they can be put.
HOW RESOURCES ARE ALLOCATED AMONG COMPETING WANTS.
Resource allocation involves deciding what, how and for whom to produce.
1.Supply and demand should factor into how resources are allocated. Products that are in great
demand should have more resources allocated to them than products that are in low demand.
When market forces are freely allowed to play out in an economy, resources are more likely to
be properly allocated,
2.In a free market economy, resources are allocated through the interaction of free and
selfdirected market forces. This means that what to produce is determined by consumers, how to
produce is determined by producers and who gets the products depends upon the purchasing
power of consumers.
3. Resources can also be efficiently allocated in a perfectly competitive market because the
profit-maximizing quantity of output produces results in the equality between price and marginal
cost.
4. In a command economy, resources are allocated according to the market forces of
demand and supply. Hence, resource allocation is determined by consumers’ demand and
producers’ supply. In command or planned economy, resources are allocated by the government
through central planning.