Complete information on four central problems of an economy

The world around us is at work. The basic aim of man is to earn an income in exchange of his service. Wants prompt people to work for the satisfaction of wants. Human wants are unlimited. But a particular want in satiable. The cycle of human wants is never-ending. The resources at the disposal of human beings are limited. The wants of the society are unlimited too. But the resources of the society like those of an individual are limited. Scarcity of resources is found in every society, in every economy.

An economy is a system by which people get a living and satisfy their wants. Wants being unlimited and resources being scarce we individually and collectively cannot satisfy our wants. This gives rise to the problem of how to use scarce resources to attain maximum satisfaction. This is generally called the economic problem. Scarcity lies at the root of all economic problems.

The individual or the society can maximize satisfaction by allocating the scarce resources on satisfying the most urgent wants. They do this by making choices. Such decisions are made continually by the individuals and society everywhere. They all spring from problems concerned with the need for economizing. This is Economics.

The problem of choice is the problem of economics. Economics is a science of choice when faced with unlimited wants and scarce resources. Prof. Lionel Robbins, Watson, Stigler, Stonier and Hague C.E. Ferguson and Scitovsky have defined Economics in terms of scarcity. The careful analysis of the scarcity definition of economics point out that human wants are unlimited, the resources to satisfy the unlimited wants are scarce, the scarce resources have alternative uses the problem of choice is the basic economic problem. This forms the core of economics.

The economic problem of scarcity of resources and multiplicity of human wants gives rise to four central problems of an economy. These four problems are four critical choices. They are:

1. The problem of allocation of resources:

This refers to what to produce. It implies what goods are to be produced and what not and in which quantities these goods are to be produced. This involves several choices for resources allocation and determination of the list of goods to be produced and their quantities.

2. The problem of efficient use of resources:

This is concerned with how the selected goods are to be produced. In other words, it means whether the goods are to be produced by the labour intensive method or capital-intensive method.

3. The problem of distribution of the goods produced:

In other words how the national income should be distributed among the factors of production. Economists have attempted to answer this question from different angles.

4. The problem of full employment of resources:

Under-utilization of resources will pose a serious problem for an economy. Besides, there is the problem of the growth of resources too.

Effective growth of resources is indispensable for attaining a higher standard of living of the people. Economic problems related to the growth of resources are discussed in the branch of Development Economics. The theoretical framework for dealing with the central problems of an economy is spelt in different branches of economic theory.

Prof. Ragnar Frisch of Oslo University has divided economics into Microeconomics and Macroeconomics. Micro means small. Microeconomics means price theory. It deals with the allocation of resources in a market economy. It studies one particular unit. It is elective not aggregative.

On the contrary, macroeconomics is aggregative economics. It is known as the Employment theory or Monetary Theory. It deals with aggregates like national income, national output, national saving, and national investment. Welfare Economics is a separate branch of economics dealing with the problems of efficiency in the sphere of production and distribution. Moreover, many statistical techniques are being used at present to analyse various economic phenomena.