Economic problem arises mainly due to two reasons- (i) human wants are unlimited (ii) means to satisfy human wants are scarce. The problem of scarcity is faced by an individual and the society. With wants unlimited and resources scarce, our wants cannot be fulfilled. This gives rise to the problem of how to use scarce means to attain maximum satisfaction. Economic problem arises from the scarcity of resources relative to human wants.
Thus unlimited wants and scarce resources lead to the origin of the basic economic problem in all types of economies, rich or poor. Scarcity of resources requires that efficient use of them be made so that maximum possible satisfaction of the people is achieved. Due to scarcity of resources we face problem of choice.
The choice with regard to which goods and in what quantities are to be produced. Problem of scarcity leads to the origin of the problem of choice of best possible pattern of allocation of resources. The economic problem can be divided into different parts. They are given as below.
1. Problem of allocation of resources:
The problem of allocation of resources arises due to the scarcity of resources. That is why the question of scarcity goods for production implies which wants should be satisfied and which should be left unsatisfied. The problem of allocation of resources deals with the question of what to produce and how much to produce.
If the society decides to produce a definite commodity in volume, it has to withdraw some resources from the production of other goods. More production implies more resources. More production of a desired commodity can be made possible only by reducing the quantity of resources used in the production of other goods. Resources being scarce if the society decides to produce one good, the production of some other goods would have to be cut down.
The problem of allocation deals with, the question whether to produce capital goods or consumer goods. If the community decides to produce capital goods, resources will have to be withdrawn from the production of consumer goods. In the long run the investment on capital goods will augment the production of consumer goods.
In an economy both capital as well as consumer goods is of equal importance. So the decision is to make social adjustment between the productions of the two.
Resources should be, most efficiently used as it is scarce. Thus it is essential to know if the production and distribution of national product made by an economy is efficient. The production becomes efficient only if the productive resources are so utilised that any reallocation does not produce more of one good without reducing the output of any other good.
By efficient distribution means that any redistribution of goods cannot make some one better off without making anyone else worse off. The inefficiencies of production and distribution exist in all types of economies. The welfare of the people can be increased if these inefficiencies are ruled out. Some cost will have to be incurred to remove these inefficiencies.
If the cost of removing these inefficiencies of production and distribution is more than the gain, then it is not worthwhile to remove them.
3. The problem of full-employment of resource:
In view of the scarce resources a very pertinent questions may arise in the mind that whether all available resources are fully utilised. A community should achieve maximum satisfaction by using the scarce resources in the best possible manner. There should not be wrong use of resources or it should not be allowed to go waste.
But in capitalist economy the available resources are not fully utilised. In times of depression there are many willing workers to work but they go without employment. It supposes that the scarce resources are not fully utilised in a capitalist economy.
4. The problem of economic growth:
If the productive capacity of the economy grows, it will be able to produce progressively more goods as a result of which the living standard of the people will rise. The increase in productive capacity of an economy is called economic growth. There are various factors affecting economic growth. The problems of economic growth have been discasted by numerous growth models.
Some of these growth models are Harrod-Domar model, neoclassical growth models of Solo and Swan, Cambridge growth models of Kaldor and Joan Robinson etc. This part of economic problem is studied in the economies of development.
Thus an economy has to solve a number of problems. But the basic cause behind all these problems is resource scarcity.