Economic problem

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The economic problem is one of the fundamental economic theories in the operation of any economy. It asserts that there is scarcity, that the finite resources available are insufficient to satisfy all human wants. The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labour) are to be allocated. Economics revolves around methods and possibilities of solving the economic problem.

Overview

The economic problem is most simply explained by the question "How do we satisfy unlimited wants with limited resources?" The premise of the model of the economic problem is that human wants are constant and infinite due to the constantly changing demands (often closely related to changing demographics) of the population. However, resources in the world to satisfy human wants are always limited to the amount of natural resources or human resources (jobs) available. The economic problem, and methods to curb it, revolve around the idea of choice in prioritizing which wants can be fulfilled.

Concepts in the economic problem

Wants

While the basic needs of human survival (food, water, shelter, health and education) are important in the function of the economy, human wants are the driving force which stimulates demand for goods and services. In order to curb the economic problem, economists must classify the nature and different wants of consumers, as well as prioritise wants and organise production to satisfy as many wants as possible.

One of the assumptions made in economics and the methods which attempt to solve the economic problem is that humans are overall greedy, and thus hoe market must produce as much as possible to satisfy them. These wants are often classified into individual wants (which depend on the individual preferences and an individual's purchasing power parity) and collective wants (those of entire communities). Things such as food and clothing can be classified as either wants or needs, depending on what type of good and how often.

Choice

The economic problem fundamentally revolves around the idea of choice. Due to the limited resources available, businesses must determine what to produce first to satisfy demand. Consumers are obviously the biggest influences of this choice, as the goods which they want must also fit within their budgets and purchasing power parity.

Opportunity cost

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Last updated on Tuesday March 04, 2008 at 05:06:29 PST (GMT -0800)
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