The basic economic problem is scarcity, which is the idea that human beings want more things than are available to them.
The economic problem, also known as the central economic problem, describes the relationship between what humans want and what's able to be produced. Since there are a limited amount of resources, people are unable to attain everything they desire. This forces humans to make choices, the study of which is the core of economics. The relationships between supply and demand drive the economy, where demand is created by human desires.
Types of Wants
There are different types of human desires that influence the economy. These include biological, cultural and demonstration wants. Biological wants include everything that people need to survive on a day to day basis. These include what one needs for clothing, food and shelter. Cultural wants are items that people are taught to need and want to have a comfortable, decent standard of living. In modern times, these wants include electricity, plumbing and a mode of transportation. Finally, demonstration wants are items that people want in order to flaunt or to be part of a higher social status. These wants include luxury items that are not necessary for survival, nor are necessary for a comfortable standard of living. These three types of wants can be individual or societal. Additionally, the idea is that human wants are unlimited, and even if one attains all of their biological, cultural and demonstration wants, the person will continue to want more of something new.
There are many factors that produce scarcity. One is the unlimited human wants versus the limited resources. The resources available to produce products is limited, which include the human resources, natural resources and capital goods. There is only a limited amount of land on Earth, and certain plots can only be used for certain purposes. Not only that, the type of human wants is constantly changing, further cementing scarcity. Unless the human wants become restrained, the economy of scarcity will continue to rule.
Examples of the Economic Problem
The relationship between scarcity and choices can be seen in many everyday examples. For instance, when a consumer contemplates a purchase, he must make a choice between buying the object and losing the money spent on it, or not obtaining the object and keeping the money. In either case, something is gained and something is lost. The thing that is lost or foregone when making a choice is known as the opportunity cost.
Conversely, if there was no scarcity, there would be no need to make choices that involve opportunity costs. For example, if there was a machine that could produce anything that a person desired, then the only limit to what that person could own would be the person's imagination. It's easy to see that money would not be necessary if such a machine existed, and thus the science of economics would be radically altered and cease to exist in its current state. This is why scarcity is considered to be the fundamental problem of economics.