Economics problems arise because a country's resources are limited in relation to her unlimited wants. Identify and explain these economic problems.

Answer Details

Because resources are scarce relative to unlimited wants, every society must make choices. These choices give rise to three basic (fundamental) economic problems:

• What to produce and in what quantities: since resources cannot satisfy all wants, society must decide which goods and services to produce (for example food versus military hardware) and how much of each. Choosing to produce one good means giving up another, which is the opportunity cost.
• How to produce: society must decide the method and combination of resources to use, for example labour-intensive versus capital-intensive techniques, so that output is obtained at the least cost.
• For whom to produce: society must decide how the goods produced are shared among the people, that is, the distribution of output, which depends on incomes and the pricing of factors.

Two further problems are often added:

• Efficiency in the use of resources: ensuring that resources are fully and efficiently employed so that no output is wasted.
• Growth of resources over time: deciding how much to save and invest now in order to expand future productive capacity.

The root of all these problems is scarcity, which forces choice, and every choice carries an opportunity cost, the value of the next best alternative forgone.