The economic problem, sometimes called the basic, central or fundamental economi c problem, is one of the fundamental economic

theories in the operation of any e conomy. It asserts that there is scarcity, or that the finite resources availabl e are insufficient to satisfy all human wants and needs. The problem then become s how to determine what is to be produced and how the factors of production (suc h as capital and labor) are to be allocated. Economics revolves around methods a nd possibilities of solving the economic problem. Economic problem arises mainly due to two reasons- (i) human wants are unlimited (ii) means to satisfy human wants are scarce. Contents [hide] 1 Overview 1.1 Opportunity cost and Production Possibility Frontier or Production Possibili ty Curve. 1.2 Needs 1.3 Wants 1.4 Choice 2 See also Overview[edit] 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 mo del is that wants are constant and infinite due to constantly changing demands ( often closely related to changing demographics of the population). However, reso urces in the world to satisfy human wants are always limited to the amount of na tural or human resources available. The economic problem, and methods to curb it , revolve around the idea of choice in prioritizing which wants can be fulfilled and how do we know what to produce for the economy. Opportunity cost and Production Possibility Frontier or Production Possibility C urve.[edit] The main theory to decipher what and how to prioritise these wants and needs is to look at the opportunity cost (looks at what good must be prioritised first ac cording to needs and how efficiently that the good can satisfy infinite wants). A good way to look at this is the production possibility frontier (PPF) or PPC, this isolates two goods in an economy produced at any one given time to show the effect of what would happen if one changed according to the other and also the effects of new technology and new resources. For example, say that we have isola ted two goods, food and clothing, and we look at what would happen if there was increased production of food (there is an opportunity cost of clothes so clothes would go down as food goes up), this varies according to what effects there are including new technology and new resources. Needs[edit] Needs are material items people need for survival , such as food, clothing, hous ing and ware. Until the Industrial Revolution, the vast majority of the worlds p opulation struggled for access to basic human needs and needs are also those thi ngs without which we cannot live. Wants[edit] While the fundamental needs of survival are key in the function of the economy, wants are the driving force which stimulates demand for goods and services. In o rder to curb the economic problem, economists must classify the nature and diffe rent wants of consumers, as well as prioritize wants and organize production to satisfy as many wants as possible. One assumption often made in mainstream neocl assical economics (and the methods which attempt to solve the economic problem) is that humans inherently pursue their self-interest and the market mechanism be st satisfies the various wants different individuals might have. These wants are often classified into individual wants, which depend on the individual's prefer ences and purchasing power parity, and collective wants, those of entire groups of people. Things such as food and clothing can be classified as either wants or needs, depending on what type and how often a good is requested. Wants are effe ctive desires for a particular product, or something which can only be obtained by working for it.

Choice[edit] The economic problem fundamentally revolves around the idea of choice, which ult imately must answer the problem. Due to the limited resources available, produce rs must determine what to produce first to satisfy demand. Consumers are conside red the biggest influences of this choice, and the goods which they want must al so fit within their budgets and purchasing power parity. Different economic mode ls place choice in different hands. 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 possib le 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 sh ould be satisfied and which should be left unsatisfied. The problem of allocatio n of resources deals with the question of what to produce and how much to produc e. If the society decides to produce a definite commodity in volume, it has to with draw 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. Re sources 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 go ods or consumer goods. If the community decides to produce capital goods, resour ces 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 goo ds. 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. 2. The problem of all economic efficiency: 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 econo my is efficient. The production becomes efficient only if the productive resourc es are so utilised that any reallocation does not produce more of one good witho ut reducing the output of any other good. By efficient distribution means that any redistribution of goods cannot make som e one better off without making anyone else worse off. The inefficiencies of pro duction and distribution exist in all types of economies. The welfare of the peo ple 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 m ore 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 ach ieve maximum satisfaction by using the scarce resources in the best possible man ner. There should not be wrong use of resources or it should not be allowed to g o waste. But in capitalist economy the available resources are not fully utilised. In tim es of depression there are many willing workers to work but they go without empl oyment. It supposes that the scarce resources are not fully utilised in a capita list economy. 4. The problem of economic growth: If the productive capacity of the economy grows, it will be able to produce prog ressively more goods as a result of which the living standard of the people will rise. The increase in productive capaci