Production, Distribution, and Organization of goods and services are the primary economic activities that accomplish humans’ needs. However, the resources that satisfy human needs are unlimited. This scarcity of resources and vastness of human desires gives birth to the central problems of an economy.
Thus, in this blog, we learn what the fundamental economic problems and solutions for them are.
Let’s discuss some essential points you should know before discussing the fundamental economics problem.
Important Points To Remember
- The issue of fundamental economic problems refers to the scarcity of resources and how to produce and distribute these scarce resources.
- Scarcity refers to the finite supply of goods and raw materials.
- The resources which are limited are known as finite resources.
- Unlimited wants states that there is no end in the quantity of goods and services people like to consume.
- Because of endless requirements, the consumption of resources is increasing more than the production of resources.
Now, let’s explore the fundamental economics problem.
What are the fundamental economics problems?
Allocation of resources is a problem that an economy faces. The scarce resources create a troublesome situation in the production of goods and services. However, it is essential to allocate the resources efficiently to satisfy the needs and resources of humans.
The decisions taken depend on the three central problems of the economy.
Study the following discussion to learn the above fundamental economics problems.
What to produce?
The economic problem refers to the decision of selecting the different commodities and the quantities that need to be produced. Labour, capital, machines, land, equipment, and natural means of resources are limited. So, it is impossible to fulfill every human need. However, it is important to decide what goods and services are needed to produce and what should be the quantity.
In an economy, the produced goods are classified into two parts; consumer goods or capital goods. Further, they both are again divided into single-use goods and durable goods.
How to produce?
This problem focuses on selecting techniques that are required to adopt and used in the production of goods and services.
The two majorly used techniques are;
- Labour intensive Technique (LIT)- This technique is used with the help of a large number of labor and small involvement of capital.
- Capital Intensive Technique (CIT)- The technique includes more capital involvement and less labor.
For whom to produce?
It is one of the common significant obstacles of an economy. It decides which commodity should be produced for which sections of society. For example, essential goods and services are in demand from all sections of society, but only a particular part of society demands luxury resources. In simple words, choices of resources rely on the taste and preference in an economy.
the examples of various economics problems?
It is one of the most basic examples of what are the fundamental economic problems. Families have scarce assets, and one requires to manage how to use these limited resources. For instance, by an annual salary of £10,000, a family might need to use £5,000 per year on council tax, rent, and service bills. It remains £5,000 for determining which new clothes, food, transportation, and other assets need to buy.
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Producers need to produce the high demanded goods and respond to changing demands and buying habits of consumers. They need to remain profitable (revenues higher than cost). Producers will need to examine the best way of producing the goods regularly.
For example, buying new machines can enhance the productivity of resources. It enables the firms to create goods at an affordable cost. It is essential for globalized companies where the latest technology reduces the costs of production. Without adapting how to produce, a firm can become unprofitable. Firms may also need to decide long-term investments to invest in the latest products and means of production.
The government has limited resources, and the amount of taxes that they collect reduces the spending power. The government must decide the methods to get tax and whom this tax can spend on. For instance, the government may need to cut profits on low-income individuals to improve incentives to work. However, lowering goods will enhance differences and relative poverty. This can be a significant point to analyze the things about the fundamental economics problem.
Solutions to the Basic fundamental Economics Problems
Unequal distribution of natural resources stops the production of goods and services in an economy. Every economy has to face the problems of what to produce, how to produce, and from whom to produce. Overall, all economics uses two main methods to solve these basic problems. Those methods are:
(i) Free Price Mechanism
(ii) Controlled Price System or State Intervention
Price mechanism refers to the system of managing and organizing the decisions of every person in an economy. It took decisions through the prices decided with the help of free play of the market forces of demand and supply.
The cost of goods and services is decided when the quantity demanded becomes similar to the quantity supplied. Price mechanism facilitates determination of resources allocation and factor incomes, level of savings, consumption, and production.
On the contrary, a Controlled price system or state intervention refers to fixing goods and services prices. The government plays a vital role in deciding the cost of goods and services. The government may include a ‘Ceiling Price’ or ‘floor Price’ policy to control prices.
In this article, we have included details about what are the fundamental economics problem. This post has also explained the three different kinds of issues that are essential to determine the economic value of the market. Understanding these parameters, one can decide the major solutions to improve economic conditions. Capitalization can be utilized for the improvement of economic problems within the market.
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1. Who is the father of economics?
Answer: Adam Smith is renowned as the father of the latest economists. He was an 18th-century Scottish economist, philosopher, and poet. He is the most famous for his 1776 book, “The Wealth Of Nations.”
2. What is the main cause of all economic problems?
Answer: Goods and services that satisfy human wants are produced with the help of resources such as land, labor, and enterprise. These resources are scarce. An economy cannot deliver all the goods and services as demanded by its citizens.