FUNDAMENTAL ECONOMIC PROBLEMS.
The main central economic problem is the scarcity of resources in relation to unlimited wants.
There are sources of basic economic problems which exist in societies needed to confident three inter-related questions. These are;
- What to produce.
It is related with the types (ranges) and quantity of goods to produce. Since resources are scarce, we must choose between different alternative collection of goods and services that may be produced.
It also involves the allocation of resources between different types of goods. For example, consumer goods and producer goods .
The decision to this question is unanswered. Differently under capitalist economy it is answered by price mechanism while in planned socialist t is determined by central planning authority and also by mixed economy.
- How to produce.
This question arise from the basic economic problem that since resources are scarce in relation to unlimited wants, we need to consider how resources are used that the best outcome may arise.
The question requires the determination of the method or techniques, the choice of the techniques of production will depend on the Efficiency and the price of factors of production i.e. the cost of production.
- For whom to produce.
Since we cannot satisfy all the wants of all the population, decisions have to be taken concerning how many of each person’s want are to be satisfied i.e. it involves who should get how much. However the distribution will depend on the economic system of socialist, capitalist economic system.
In some economies the deliberate attempt to create policies that re-distributes wealth and income from rich to poor. This could be through the adaption of progressive taxation system.
In other economies there are no such policies and qualities of wealth and income usually based up on inheritance remain extreme.
Answering this question moral aspect of decision making become important.
- Where to produce.
The producer has to make decision regarding the place where the firm has to be located. The location of the firm depends on the;-
- Availability of the means of transport and communication, power and water supply.
- Supply of labor.
- Availability of banks, hotels, schools, and hospitals etc.
- When to produce.
A producer must also decide the right time to produce a given commodity.
- How much to produce.
It relates to mankind decision regarding the quantity or amount of the commodity to be produced.
The answer to the above problem is determined by different economic systems.
- In socialist economy, the use of central planning authority.
- In capitalist economy, the use of price mechanism.
- In mixed economy, the use of both methods.
SCARCITY AND CHOICE
Other decisions on economic problems centers round the two basic concepts, scarcity is useful to understand them more clearly.
Scarcity: – The scarcity implies limitlessness in supply therefore; when we say the resources of a country are scarce it means that the resources are limited in supply.
A resource is said to be scarce when there isn’t enough of it to satisfy all the people’s wants, but if;
- Economic goods and services are scarce in the sense that is not available in sufficient of zero prices. If something is so abundant that we can have all we want without paying for it is not a scarce commodity e.g. Air under ordinary circumstance is not scarce.
- Economic goods and services are scarce relatively to the people’s desires for them.e.g. There are more good bananas than bad banana, but it is good bananas which are scarce because it is the good one which people desire to consume.
- The scarcity of economic goods and services arises from scarcity of resources such as land, labor, capital and entrepreneur used to produce them.
Regarding the problem of scarcity we must be very clear in our minds that it is found in all countries whether it may be poor or rich country. However the form scarcity here is used in relative sense of resources is limited in relation to man’s wants. In this sense if it is true for a rich and developed country thus scarcity is a fundamental problem and universal in nature.
Because of scarcity in resources, we must choose from among the many wants and whenever we choose we must force go satisfying. Some economists defined economics as a study of how people choose to use their scarce resources in attempt to satisfy their unlimited wants. Since there are insufficient productive resources in the world, therefore man is left to find the solution to that problem and the first option is to economize, that is to make the best and efficient use of the resources available without any wastage.