An economic problem is basically the problem of choice which arises because of scarcity of resources. Human wants are unlimited but means to satisfy them are limited. Therefore, all human wants cannot be satisfied with limited means. Wants differ in intensity and limited resources have alternative uses. In such a background, every consumer tries to satisfy his maximum wants. Therefore, one has to choose as to what goods one should consume and in what quantity. Economic problem arises the moment problem of choice arises. Actually speaking, economic problem is basically the problem of choice.
Due to scarcity of resources, the problem which arises before an individual consumer also arises collectively before an economy. On account of scarcity of resources, an economy has to choose between the following:
(i) Which goods should be produced and in what quantity?
(ii) What technique should be adopted for production?
(iii) For whom goods should be produced?
These three problems are known as the central problems or the basic problems of an economy. This is so because all other economic problems cluster around these problems. These problems arise in all economies, whether it is socialist economy like that of China or a capitalist economy like that of America.
From the above analysis, it is clear that an economic problem arises because of the following causes:
(i} Human wants are unlimited:
Human wants are unlimited. After the satisfaction of one want, another want arises. There is a difference in the intensity of wants also. Thus, there is an unending circle of wants, when they arise, are satisfied and arise again.
(ii) Limited resources:
Means are limited for the satisfaction of wants. Scarcity of resources is a relative term, for satisfying a particular human want, resources can be in abundance, but for the satisfaction of all the wants, resources are scarce. This is called relative scarcity of resources where resources are scarce in relation to the wants they are expected to satisfy.
(iii) Alternative uses of resources:
Limited resources can be put to many alternative uses. For example, electricity can be used for domestic light as well as for industrial power.
(iv) Problem of choice:
Human wants are unlimited but resources to satisfy them are limited and this gives rise to the problem of choice, such as what should be produced and how and for whom production should be done. The problem of choice is the economic problem. Had resources also been unlimited like human wants, there would have been no problem of choice and hence no economic problem. In other words, scarcity of resources is the mother of all economic problems. In short, "Multiplicity of wants and scarcity of means are the two foundation stones on which the whole edifice of economic problems stands."