1.

The nature of the economic

problem
The Economic problem (central)
Definition
people have unlimited wants and needs but only limited resources that can fulfill them. So
how to fulfill those needs with limited resources is the economic problem. This is the
economic problem faced by all societies.

Causes of the economic problem→

Scarcity of resources

Unlimited human needs and wants

Alternative Uses

Economic Agents
» individuals or households
» firms (businesses that operate in the private sector of the economy)
» the government.

Questions answered by Economic Agents:

→what to produce?

A country cannot produce all goods because it has limited resources.

It has to make a choice between different goods and services.

Every economy has to decide what goods and services should be produced.

Example: If a farmer has a single piece of agricultural land, then he has to make a choice
between two goods, i.e., whether to grow rice or wheat.

Similarly, our government has to decide where to allocate funds, for the production of
defense goods or consumer goods, and if both, then in what proportion.

→whom to produce it for?

1. The nature of the economic problem 1

 The society cannot satisfy all the wants of all the people. Therefore, it has to decide who
should get how much of the total output of goods and services.

Society has to make the choice of whether luxury goods or normal goods have to be
produced. This distribution or proportion directly relates to the purchasing power of the
economy.

→how to produce it?

This problem refers to the choice of technique of production. It arises when there is an
availability of more than one way to produce goods and services.

There are mainly two techniques of production. These are:

Labor intensive technique

Capital-intensive technique

Labor-intensive technique promotes employment whereas capital-intensive technique

promotes efficiency and growth.

Private and Public Sector

Private Sector
The private sector constitutes the segment of the economy owned, managed and controlled by
individuals and organizations seeking to generate profit. Companies in the private sector are
usually free from state ownership or control. However, sometimes the private sector can
collaborate with the government in a public-private partnership to jointly deliver a service or
business venture to a community.

Public sector
public sector, a portion of the economy composed of all levels of government and
government-controlled enterprises. It does not include private
companies, voluntary organizations, and households.

Needs and Wants

Needs
Needs are the essential goods and services required for human survival. These
include nutritional food, clean water, shelter, protection, clothing, and access to
healthcare and education.

1. The nature of the economic problem 2

 Wants
Wants are goods and services that are not necessary for survival but are human
desires — that is, things we would like to have.

Economic and Free Goods

Economic Goods
A economic goods is a good or service that producer provides to meet the needs and wants of
consumer. It provides utility to the consumer. Example- Private goods, public goods, etc.

Free Goods
Free goods are goods that can be produced without the use of other economic
resources. Air and sunlight are two easy examples that you can come across.

1. The nature of the economic problem 3