Way to economics 06

Way to economics 06

Inquires the Basic Economic Problems.

 Due to the scarcity of resources and with its alternative uses any society
should make three choices
 These three choices are common to any society
 These three choices are identified as basic economic problems in
economics.

 In this regard basic economic problems means,

1. What to produce in what quantity?
2. How to produce?
3. For whom to produce?

 Due to the scarcity of resources and alternative uses any society would
face the basic economic problem of what to produce in what quantity?
Examples:- Using scarce resources, it has to be decided which goods to be
produced?

Whether to construct hospitals or schools
Whether to construct factories or playgrounds
Whether to produce consumer goods or capital goods

 Similarly it should decide the quantity of the selected goods to be
produced

Examples:- How many hospitals?
How many factories?
How much of capital goods?

 In this way the resources should be allocated after deciding what goods to
be produced and in what quantity
 Also when producing the decided goods in the decided quantity it should
be decided how much of resources should be used for the present and
how much left for the future. ( which means it has to be decided from
available resources how much is used at the present and how much is kept
for the future)

 As the resources are distributed after deciding what to be produced in
what quantity, this basic economic problem is also identified as a resource
allocation problem.

 Due to the scarcity of resources and alternative uses any society would
face the problem of how to produce as well.
 The basic economic problem of “How to produce?” means which
production technique should be used in producing goods and services?
 Also it is the idea which resources are to be used in which proportion
 Two production techniques can be used to produce goods and services as
labour intensive production technique and capital intensive production
technique .
 Labour intensive production techniques use more of labour and relatively
less capital and capital intensive production techniques use more of
capital and less of labour.

 As the production has to be carried out with the use of any production
technique, the basic economic problem of how to produce is also
identified as a problem of production.
 The problem of whom to produce means among whom the total product
of the economy is to be distributed.
 Which means who own the limited amount of goods and services
produced with the use of scarce resources.
 The use of goods depends upon a person’s income.
 Factor owners earn income in the form of wages, rent, interest and profits.
 The income gained by each person differs on factor ownership and at
factor price.

 The person who own more factor income will have the chance of
consuming more goods produced and the person who owns less factor
income will have the less chance of consuming the goods produced.
 In this way the consumption of goods depends upon a person’s income
the problem of the whom to produce is also identified as a problem of
distribution.