Basic economic problem of mankind owes its origin to the fact that human wants are numerous and of different kinds. The resources to satisfy these multifarious human wants are limited or scarce.
Explanation with Diagram and Examples:
If the time or resources at our disposal are unlimited so that we could satisfy all our wants, then no economic problem would have arisen at all. Or if we had Aladdin’s lamp with us so that we could satisfy all our wants by rubbing it, then there would have been no economic problem. The economic problem has arisen simply because as one want is satisfied, another want appears on the scene.
We can liken this to a see-saw with on one hand the finite or limited resources and on the other hand the unlimited or infinite wants.
As wants are unlimited and the means to satisfy them limited, therefore, in order to get maximum satisfaction, we are to choose our wards by fixing up a list of priority. So there are two foundation stones on which the subject of economics rests, these are:
(1) Multiplicity of human wants.
(2) Scarcity of resources.
This scarcity of means or resources creates two kinds of problems:
One is the allocation of resources to the best use so that the maximum satisfaction is achieved. This can only be done if we arrange our wants in a scale of preferences. Ordinarily, necessaries are satisfied first, comforts are next and luxuries at the end.
Second problem is to eliminate waste. If in a country the resources are not fully utilized and they are lying idle, this will mean the maximum satisfaction is not being derived from the limited available resources and being wasted for nothing.
The resources are not only scared but have alternative uses. So a decision has to be made between them. The decision to make choices between alternative uses has to be made by all of us. Even the richest nation has distributed its resources in such a manner so as to be able to source maximum satisfaction with minimum cost.
How Economics Solve Economic Problems (Questions)?
Every economy has to solve the following inter related problems (questions):
(1) What goods to be produce?
(2) How to produce?
(3) How to distribute income?
(4) How to ensure growth?
These problems (questions) are now discussed in brief:
(i) What goods to be produce? The first function of the society is to decide which goods are to be produced and in how much quantity. Since the resources at the disposal of the society are scarce, it has to make a choice between “guns or butter”, or a choice between necessities and luxuries. The decision about the allocation of resources between consumer goods and capital goods; their quality and quantity is of utmost importance from the point of view of economic growth.
(ii) How to produce? There are various alternative methods or techniques of producing goods. The society has to choose the least cost combination of producing the goods. For example, cloth can be produced with either handlooms (labor intensive technique) or power looms (capital intensive technique). The society, depending upon its resources and the state of technology available to it should use the most efficient method of production.
(iii) How to distribute the national income? The distribution of national income among the members of the community is a burning issue both in the field of economics and politics. The socialists are of the view that all the people should get fair share by redistribution of national income. The other view is that, in a free enterprise economy, each individual should get his share from the total output of goods according to the income available to him through his genuine efforts.
(iv) How to ensure growth? The economic growth can be attained by (a) increasing the rate of investment (b) replacement of capital goods and (c) by improving the technical processes of production. A society, therefore, shall have to take timely decisions for allocating scarce resources for investment, replacement and technological progress. In case a part of the resources are not diverted for capital accumulation and technological progress, the rate of growth will go down. The standard of living of the people will fall.
We, thus, conclude that economic problem arises because of scarcity of resources that people want for the satisfaction of goods. The scarcity of resources involves the problems of choice or allocation of resources among the competing ends. Economics, in short, is a science of efficiency in the use of scarce resources.