Human wants are unlimited and productive resources such as land and other natural resources, raw material, capital equipments etc. with which goods and services are produced to satisfy those wants, are scarce. The problem of scarcity of resources is felt not only by individuals but also by the society as a whole. This gives rise to the problem of how to use scarce resources to attain maximum satisfaction. This is generally called ‘the Economic Problem’. Every economic system, be it capitalist, socialist or mixed, has to deal with this central problem of scarcity of resources relative to wants for them. The central economic problem is further divided into four basic economic problems.
These are:
(i) What to produce : Every society has to decide which goods are to be produced and in what quantities. Whether more guns should be produced or more butter should be produced; or whether more capital goods like machines, equipments, dams etc., will be produced or more consumer goods such as bread will be produced. Not only the society has to decide about what goods are to be produced, but it has also to decide in what quantities these goods would be produced. In a nutshell, a society must decide how much wheat, how many hospitals, how many schools, how many machines, how many metres of cloth, etc. have to be produced.
(ii) How to produce : There are various alternative techniques of producing a commodity. For example, cotton cloth can be produced with either handlooms or power looms or automatic looms. Production with fyandlooms involves use of more labour and production while automatic loom involves use of more machines and capital. A society has to decide whether it will produce cotton cloth using labour-intensive techniques or capital-intensive techniques. Likewise, for all goods and services, it has to decide whether to use labour intensive techniques or capital-intensive techniques. Obviously, the choice would depend on the availability of different factors of production (i.e., labour and capital) and their relative prices. It is in the society’s interest to use those techniques of production that make best use of the available resources.
(iii) For whom to produce : Another important decision which a society has to take is for whom to produce. The society cannot satisfy all the wants of all the people. Therefore, it has to decide who should get how much of the total output of goods and services. In other words, it has to decide about the share of different people in the national cake of goods and services.
(iv) What provision should be made for economic growth : A society would not like to use all its scarce resources for current consumption only. This is because if it uses all the resources for current consumption and no provision is made for future production, the society of the people would remain stagnant, and in the future, the level of living may decline. Therefore, a society has to decide how much savings and investment (i.e. how much sacrifice of current consumption) should be made for future progress.
