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        The economic problem, sometimes called the fundamental economic
 problem, is one of the fundamental economic theories in the operation of any
 economy. It asserts that there is scarcity, or 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. Economic revolves around methods
 and possibilities of solving the economic problem.

        In short, the economic problem is the choice one must make, arising
 out of limited means and unlimited wants.

        The economic problem is most simply explained by the question “how
 do we satisfy unlimited wants with limited resources?” The premise of the
 economic problem model is that human wants are constant and infinite due to
 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 or human resources
 available. The economic problem, and methods to curb it, revolves around
 the idea of choice in prioritizing which wants can be fulfilled.

            Human needs are material items people need for survival, such as
 food, clothing and some from of housing. Until the Industrial Revolution, the
 vast majority of the world’s population struggled for access to basic human
            While the basic needs of human survival 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 prioritize wants and organize production to satisfy as many wants as

           The economic problem fundamentally revolves around the idea of
 choice, which ultimately must answer the problem. Due to the limited
 resource available business must determine what to produce first to satisfy
 demand. Consumers are considered the biggest influences of this choice and
 the goods which they want must also fit within there budgets and purchasing
 power parity.

        The basic economic problem is that resources are scarce relative to the
 purposes to which they could be put. As a result choices have to be made
 about how to use resources. The basic economic problem is thus frequently
 referred to as ‘scarcity and choice’. A resource regarded as any feature of our
 environment that helps to support our well-being.

     There are two main types of resource:
 1. Physical or natural resources – such as well, climates, water, minerals,
    forests and fisheries.
2. Human resources – People and there various skills.

 If we were to take stock of the world’s existing bundle of resources we
 would find that there are severy limitations to its ability to meet our infinite
             Scarce resources can be broken down into four key ingredients:
land, labour, capital and enterprise. Land includes all natural resources; labour
includes all physical and mental effort; capital includes machinery and other
items that go into further production; and enterprise is the art of combining the
other three factors in the production process.

     Scarcity can be seen as resulting from the lack of availability in
resources, from peoples insatiable wants, or from a combination of the two.

          The basic economic problems are:
                       WHAT TO PRODUCE?
      This means an economy can chooses the mix of goods to produce.
Should an economy devote resources to health and education indifference and

      You have brains in your head. You have feet in your shoes.
                      You can steer yourself any direction you choose.
                                                 .... Dr. Seuss

        Every economy must answer three basic questions: what goods and
services to produce, how to produce them, and for whom to produce them.

       Remember that resources (land, labor, capital, entrepreneurship) are
scarce or limited. We cannot have everything; we must make choices. Which
ones are best? For allocate efficiency we should choose the combination of
goods and services that creates the most value or utility.
        Every choice bears a cost. We cannot choose one option without
forfeiting another. Suppose the choice is to produce either a bag of potato chips
or a tube of lipstick. If we choose the potato chips, we lose the lipstick. If we
choose the lipstick, we lose the chips. To an economist, true costs are what we
must sacrifice or give up to get something. In this case, the cost of the potato
chips is the lost lipstick, and the cost of the lipstick is the lost bag of chips. The
professional jargon calls these opportunity costs. Opportunity costs are the
value that must be sacrificed or given up. They also are the value of our next
best alternative or opportunity. Why? Every time we make a choice, what we
sacrifice is our next best alternative.

       Rational decision makers will compare the relative values of potential
goods and services. Or, in the jargon of economics, they compare the benefits
and opportunity costs of that choice.

                       HOW TO PRODUCE?
        This means who will do the production and which methods of
production will be used. Should the economy use a system that is labour
intensive and there by ensures everyone has a job who wants one or should we
use more efficient methods of production that involve the use of machines even
if this means fewer jobs?

        Waste not, want not.
                     ...anonymous proverb

        To reach our production-possibilities curve (PPC) we must get the most
we can from our limited resources. If we waste resources or use them
inefficiently, we will produce less than we possibly could and drop inside or
beneath our PPC. In other words, we need to produce with technical
efficiency. That is, we need to use the least-cost methods of production. Using
$5 of resources to produce what could have been made with $4 of resources is
throwing away the potential output we could have gotten from the wasted
       What method is best? There is no so single answer. It will depend upon
the particular good and particular resources in question. However, the best
methods almost always will involve significant specialization.

       We are very specialized producers. For example, I specialize in
economic lectures. I produce lectures, earn income from doing so, and use my
income to trade for goods and services produced by others. This specialization
makes us all interdependent. We need others to produce the goods that we do
not make ourselves.

        Why do we choose to specialize and trade with others rather than being
self-sufficient? Simple. Specialization and trade raise our standard of
living. We reap gains from specialization and trade for two major reasons.

        First, specialization allows us to practice and learn to become more
proficient. If we spread our time and effort trying to play all sports, we never
become expert in any one. If we specialize in baseball we can practice baseball
skills repetitively. The practice helps us improve. The saying “practice makes
perfect” certainly exaggerates, but practice does make us better.

         Second, specialization allows us to take advantage of our particular
talents. People differ. Specialization allows us to concentrate on what we do
best. Some of this is obvious. If Annie excels at cleaning and Laurie at
cooking; it makes intuitive sense that Annie should specialize in cleaning and
Laurie in cooking. If Annie can then trade some of her cleaning efforts to
Laurie in return for Laurie’s cooking, both women should gain.

            This means who will consume the goods and services after they been
produce- how will it be decided who receives them/ should an economy be
geared to provide goods and services to every person as equally as possible or
should those who work hard get more? What is the best method of distributing
products to ensure the highest level of wants are met? In a free market
economy, the producers of products determine social needs through the use of
market signals. The most common of these signals is demand for products. It is
often easily visible by what is known as demand-pull inflation, increases in the
price of wanted goods due to a lack of supply and the purchaser's willingness to
pay more for the product to guarantee himself access to it. This sends a signal to
producers of the good that they can maximize their profits by allocating further
resources to producing the good being demanded as opposed to other possible
      As production increases, the price level of the product in question
ultimately settles at a new equilibrium point (the point at which supply equals
demand) and both consumers and producers are content.

       When goods compete, these signals determine which product 'survives',
as with VHS/BetaMAX and HD-DVD/Blu-Ray. The more heavily demanded
good acquires more market share until it is unprofitable to manufacture the less
heavily demanded good and ultimately it is phased out. As actors in an
economy will undoubtedly pursue the better of products, this encourages
innovation and development of new and better products to compete with those
that currently dominate the market landscape.

        Production is pursued in a manner which ensures the least waste and
maximizes efficiency, as to therefore maximize profit. The consumers, those for
whom the goods are produced, are catered to by the producers, and are
generally anyone who has goods/currency to exchange for the products they


      A society has to decide how much savings and investments (that is, how
much sacrifice of current consumption) should be made for future economic

      Generating shared and sustainable economic growth is the single most
important objective for the Asia Pacific region over the next ten years.

      Despite the impressive export-led growth of the region there remain
severe disparities between and within countries. These are likely to grow over
the medium term if current trends continue.

       Growth needs to be employment-intensive and to encompass regions that
are lagging, in order to secure stability and reduce poverty.
      To be sustainable, growth needs to confront a number of environmental
challenges, such as scarcity of and competition for water resources, climate
change, and widespread abuse of and non-compliance with environmental

      Australia supports policies and programs to generate increases in
aggregate growth and, in special circumstances, target groups and regions that,
for whatever reason, are not benefiting from broader growth.

To accelerate economic growth the Australian aid program focuses on:

      Improving the policy environment for growth
      Promoting trade
      Infrastructure development, rural development and building skilled
      Addressing the environmental challenges to growth including
       management of fresh water resources.
                 How are Basic Problems Solved?

         We have explained above the four basic problem often economy which
must be solved some-how or order by an economy. Now, the important thing to
know is how an economy solves these central problems which are essential to
its functioning. There are three main methods to solve these central problems.
They are:

   1. Capitalist economy
   2. Planned economy
   3. Mixed economy

   1. Capitalist Economy:

         Problems                     Solution in Capitalist Economy
1. WHAT TO PRODUCE?            Under capitalism, the first two are determined
                               based on supply and demand. When there is
                               more demand for something than there is
                               available supply of it, the profit margin for
                               producing that thing increases and capital
                               investments will be made to increase
                               production, producing profits for the investors.
                               However, it will be to the investor's benefit to
                               not produce an excess, as this would result in
                               there being more supply than demand, which
                               depresses the price and destroys the profits.
2. HOW TO PRODUCE?             How to produce is simply, by the most
                               efficient and economical means possible. The
                               capitalist's (investor's) principal goal is to
                               maximize profit, which is accomplished by
                               producing the needed goods or services in the
                               most efficient (least expensive per unit
                               produced) means possible, and heavy
                               investment in research and development to
                               improve efficiency will generally pay off
         Problems               Solution in Capitalist Economy
  3. FOR   WHOM       TO For whom to produce -- simply put, for those
     PRODUCE?            who want something enough to pay for it.
                         There is an underlying assumption of the
                         ABILITY to pay, and of course the
                         socialist/communist theorists of the world
                         quickly jump on this and claim that this is the
                         great "failure" of capitalism because it
                         disenfranchises the poorer classes. But that is
                         simply ignorance of the true beauty of the
                         capitalist system -- in the capitalist system,
                         there are HUGE profits to be made by finding
                         ways to produce goods and services so
                         efficiently that even the poorest can afford
                         them. This is due to the simple fact that
                         historically the poor outnumber the wealthy by
                         factors of 10, 20, or 50 to one. When
                         producing goods or services for the poor one
                         must make considerably less profit on a per-
                         unit basis, but this apparent "shortfall" is more
                         than made up for in volume.

 3. Mixed Economy:
          Problems                  Solution in Mixed Economy
   3. Planned Economy:
          Problems               Solution in Mixed Economy
1. WHAT TO PRODUCE?    In this method, the solution of the various
                       basic problems is not achieved through the
                       free working of demand for and supply of
                       goods and factors. But to solve this problem,
                       Government sets up a central planning
                       authority which has been called by several
                       names such as planning commission, planning
                       ministry or planning board.
2. HOW TO PRODUCE?     What goods should be produce and in what
                       quantities, bow should they be produce, how
                       should they be distributed among the
                       population and how much should be invested
                       to bring about economic growth are all
                       decided by the basic planning authority. This
                       method of solving the central problems
                       through the use of economic planning had
                       been adopted in the former communist
                       countries such as Soviet Russia, Poland etc.
3. FOR    WHOM      TO There are thus to steps in the process of
   PRODUCE?            distribution. The first is the distribution money
                       incomes can be earned either by doing world
                       for by landing the services of one’s properties
                       such as land, capital and houses. Next step in
                       the distribution process is the sharing of goods
                       and services between different individuals or

        We have only indicated here that there are three main methods of
solving the basic problems. How these basic problems are solved by a capitalist
economy, mixed economy and centrally planned economy socialist economy.