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Economic Problem

Updated on October 16, 2012

What is an Economic problem in Microeconomics?

To satisfy the social and biological needs of a man and improve the standard of living one is in need of many articles and services like shoes, books, food, furniture, scooter, fridge, TV set, cloths, house, pens, recreational and medical facilities etc. Often the income he earns is not so much as to purchase all these services and goods. Or he is not able to buy all the facilities available with his limited income. The only way out is to pick and choose only those facilities or goods which are more urgent and leave those which are less important. He has to make his choice from the available goods and resources with his limited income. This situation is an economic problem of an individual. The problem of choice arise due to scarcity of resources and their alternative uses.

A society as a whole can also face this kind of problem. A society requires a number of goods like roads, dams, tractors, ships, rockets, rail engines, cars, petrol, houses, factories, buses, power, canals and other means of irrigation, fertilizers, tanks, trucks etc. But the resources like land, labor, capital and enterprises are limited which have alternative uses. In order to obtain maximum satisfaction of goods and services, the society must have to make choices among alternative uses of available resources.

Economic problem is the problem of resource allocation or making choices in the use/allocation of scarce resources having alternative uses.

According to Oscar Lange when he defines Economics as a “Science of administration of scare resources in a human society.”

According to Prof. Erich Roll, “Economic Problem is essentially a problem arising from the necessity of choice; choice of manner in which limited resources with the alternative uses are disposed of. It is a problem of husbandry of resources.”

In the words of Prof. Leftwitch, “Economic problem is concerned with the use of scarce resources among alternative human wants and in using these resources towards the end of satisfying wants as fully as possible.

Causes of Economic Problems

Economic problem has the following causes.

  1. Unlimited wants

  2. Limited Resources

  3. Alternative uses of Resources

Unlimited Wants: Human wants are increasing day by day. We always look for things and facilities which are not currently available to us. If you do not have a mobile phone, you are looking for a mobile phone. If you do have a mobile phone, you are looking for a better one with lots of facilities like better camera, better voice, internet browsing facilities etc. Once you satisfy your one need, the other one comes up. When you satisfy your need of a mobile phone, the need of a car arise in front of you. Human wants are numerous, but the urgency or intensity of the wants may differ. If you are sick, you need medical facilities, your need for a car can wait till you get cured of your sickness. As per the urgency, you can choose and arrange wants and make choices.

Limited Resources: Goods and services of an economy is produced from the limited resources. Resources or factors of production like available land, water, time, minerals labor, capital and enterprise are limited as against the unlimited wants. There won't be any problem, if the resources are unlimited. When resources are unlimited, there is no need to make choices. Hence there is no economic problem. But in reality, the resources are limited and the society have to pick and chose goods and services as per the urgency of the wants. There is a great need for economizing resources due to the limitation of resources. So the society have to make the best use of resources.

Alternative use of Resources: Resources like land cannot be used for more than one purpose at a time. A plot of land can be used either for a playground or for farming or for constructing a building for office or for residential purpose at a time. At one time, it can be used for only one purpose. If you look at a skilled worker, he can work only one place at a time. His is not able to work at multiple location or multiple industry at a time. An economy is constantly faced with the problem of choice between alternative commodities that can be produced with these resources. There will no choice or economic problem, if resources have only specific purposes. For example, if a worker can be worked only one place, then there is no choice. If a land can be used for only one purpose, then there is no choice. If there is no choice or alternative use, then there is no economic problem.

Economic problem arise out of two characteristics of the resources. They are:

  1. Economic resources have alternative uses

  2. Economic resources are limited.

Resources having alternative uses in relation to unlimited wants gives rise to an economic problem. Therefore an economy has to economize its resources, that is, make the best use of its available resources. Hence, it has to make a choice among its resources. This problem of making a choice in resource allocation is called the basic or central economic problem of an economy.

The Problem of Scarcity

Economic problem is the problem of scarcity. Scarcity means shortage of a particular commodity. In economics scarcity means limitation of supply of a commodity in relation to its demand. Or it is excess of demand over supply. When resources are not available in sufficient quantity to satisfy all human wants, we can call it scarcity of resources. In such occasions, it gives rise to make choice among alternative uses of limited resources. Therefore, choice and scarcity goes together. And the source of Economic Problem is the scarcity of resources.

Had the resources been in abundance, unlimited goods and services would have been produced to satisfy unlimited human wants and there would have been no economic problem. If you had a magic band which produces all your needs and desires, there is no problem at all and the world would have been a different place.

But the reality is not like that. Efforts are made to economize limited resources, by allocating them in such a way as to produce maximum goods and services to satisfy maximum wants. Making the optimum or best use of available resources is known as the problem of economizing.

All types of economies – capitalist or socialist, rich or poor - has the basic problem of scarcity or resources. This brings the question of "what, how and for whom to produce"

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