The nature of the economic problem
#economics #economicproblem
The nature of the economic problem: finite
resources and unlimited wants
In every country, resources are limited in supply and decisions have to be made
by governments, fi rms (businesses) and individuals about how to allocate scarce
resources to satisfy their unlimited needs and wants. This is known as the basic
economic problem, which exists in every economy: how best to allocate scarce
resources to satisfy people’s unlimited needs and wants. Essentially, economics is
the study of how resources are allocated to satisfy the unlimited needs and wants
of individuals, governments and fi rms in an economy.
The three main economic agents (or decision makers) in an economy are:
individuals or households.
firms (businesses which operate in the private sector of the economy).
the government .
The three basic economic questions addressed by economic agents are:
What to produce?
How to produce it?
For whom to produce it?.
Firms and individuals produce goods and services in the private sector of the
economy and the government produces goods and services in the public sector.
For example, the government might provide education and healthcare services
for the general public. All economic agents (governments, fi rms and individuals)
produce and consume goods and services.
Goods are physical items that can be produced, bought and sold. Examples are
furniture, clothing, toothpaste and pencils. Services are non-physical items that
can be provided by fi rms and paid for by customers. Examples are haircuts, bus
journeys, education, concerts, telephone calls and internet access.
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. All individuals have a right to have these needs met
and this is stated in Articles 25 and 26 of the United Nations Universal
Declaration of Human Rights, drafted in December 1948.
Article 25
Everyone has the right to a standard of living adequate for the health and wellbeing of himself and of his family, including food, clothing, housing and medical
care and necessary social services, and the right to security in the event of
unemployment, sickness, disability, widowhood, old age or other lack of livelihood
in circumstances beyond his control.
Article 26
Everyone has the right to education. Education shall be free, at least in the
elementary and fundamental stages. Elementary education shall be compulsory.
Technical and professional education shall be made generally available and higher
education shall be equally accessible to all on the basis of merit.
Wants are goods and services that are not necessary for survival but are human
desires — that is, things we would like to have. Wants are unlimited as most
people are rarely satisfi ed with what they have and are always striving for more.
Wants are a matter of personal choice and part of human nature.
World Bank fi gures suggest that over 3 billion of the world’s inhabitants live on
less than $2.50 per day and more than 1.3 billion live in extreme poverty (less
than $1.25 a day). These fi gures suggest that their basic needs are not being met.
In contrast, the ten richest people on the planet have wealth equivalent to the
poorest half of the world’s population. The study of economics can help to explain
why this happens and offer possible solutions to the basic economic problem.
Economic goods and free goods
An economic good is one which is limited in supply, such as oil, wheat, cotton,
housing and cars. It is scarce in relation to the demand for the product, so human
effort is required to obtain an economic good.
Free goods are unlimited in supply, such as the air, sea, rain water, sunlight
and (to some extent) public domain webpages. There is no opportunity cost in
the production or consumption of free goods.
A free good is not the same as a good that is provided without having to pay
(such as education or healthcare services provided by the government). The latter
has an opportunity cost (the money could have been spent on the provision of
other goods and services) and is funded by taxpayers’ money.
Scarcity is one of the key concepts of economics. It means that the demand for a good or service is greater than the availability of the good or service. Therefore, scarcity can limit the choices available to the consumers who ultimately make up the economy.
Resources are scarce because we live in a world in which humans' wants are infinite but the land, labor, and capital required to satisfy those wants are limited. This conflict between society's unlimited wants and our limited resources means choices must be made when deciding how to allocate scarce resources.
What to produce?, How to produce?, and For whom to produce?
Different economic systems address scarcity in different ways, including:
Capitalism
In a capitalist system, market forces and prices are used to allocate resources. The free market and supply and demand determine production and pricing with little government intervention.
Socialism
In a socialist economy, the government controls production, distribution, and prices. The goal is to ensure that everyone has access to the same resources.
Mixed economy
In a mixed economy, a combination of rationing and free pricing systems are used to deal with scarcity. Businesses respond to pricing changes to meet society's demand for goods and services.
When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else.