Basic Problems of Economics

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Basic Problems of an Economy

Economics is a social science like sociology, political science, etc. As a social science, economics concentrates on the study of how man makes use of his limited resources to get maximum satisfaction.

Basic Problems of Economics

Generally, the study of economics deals with production, distribution, exchange and consumption of goods. Lord Robins aptly defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.’

Economics is a (social) science because it adopts the scientific method. The scientific method involves the following:

  • Observation of events and their outcomes.
  • Formulating a hypothesis, i.e. formulating a theory to be proved or disproved by reference to facts.
  • Collecting data.
  • Organising/analysing the data.
  • Formulating laws -an economic law being a generalized statement ofa particular tendency, is a statement of an invariable relationship between specified economic conditions and phenomena.
  • Testing the laws with a view to proving them right or wrong.
  • Making predictions on the basis of the laws.

Basic Economic Goals and Problems of Society

Scarcity and choice are the cardinal problems faced by economists and the society at large. The study of economics is necessitated by scarcity and the problem created by scarcity has led to choice.

Choice involves decision making and it is within the control of man to decide on how the available resources should be used. The need for choice is to ensure that the available resources are efficiently used or allocated so as to satisfy human wants as far as possible.

In order to ensure the efficient use of resources, we need to take certain economic decusuons which are loosely referred to as the basic problems ofthe society. However, let it be emphasized here that all economic problems arise out of scarcity of resources and it is scarcity that actually leads to choice.

Therefore, the problem created by choice is secondary te mankind.

Every society irrespective of the type of economic system adopted; whether capitalism or socialism, is faced with the follownng basic fundamental economic problems or decicions.

Economy Goals of a Society

With the available resources, every society has he following objectives or goals to achieve:

  • Efficient allocation of the available resources.
  • Creation of job opportunity.
  • Promoting economic growth and development.
  • Promoting the standard of living of the people.
  • Controlling inflation and deflation.
  • Maintenance of defence.

Basic Economic Problems

All societies, no matter the form of economic or political systems practiced, are faced with some basic economic problems. These are:

1. What to Produce?

Every society has to decide what to produce and the quantity to produce. This will depend largely on the factor endowment of the society as well as its level of technological development. Because of limited resources, the more it produces one good or service, the less it can produce others.

This is the problem of resource allocation. What to produce depends on the needs and the wants of the people.

Factors Determining What to Produce

Every society is faced with the first problem of determining what goods and services to be produced and the quantity to be produced. This problem arises mainly as a result of the fact that human wants are unlimited and insatiable relative to the available resources.

The problem therefore arises when deciding which of these wants should goods and services be produced to satisfy. The question will be, should more food be produced in order to feed the teeming population or should more arms and ammunitions be produced in order to strengthen the defence of the scale’s territory?

Therefore, choice has to be made of which of these goods to be produced. Production of one of these commodities in large quantity will definitely lead to production of the others in small quantity/ opportunity cost.

The economic system the society adopts goes a long way in determining the type and quantity of odds an services that should be produced. In a capitalist society, the rice system determines the type and quantity of goods and services that are to be produced.

Profit motive is the guilding principle. High prices that will guarantee more profits lead to increase in the production of more oods and services and vice versa. On the other hand, in a socialist economy the government decides what to be produced.

In spite of that, goods and services are produced with the sole aim of satisfying the wants of the whole citizens of the society as opposed to the profits they will fetch.

2. How to Produce?

The society has to decide how goods are to be produced. It will be necessary to consider whether to produce by labour intensive or capital intensive techniques. This will entail the method or technique of production and the distribution of different activities in the society.

It has to solve such questions as who produces what? What scale of production? Who works and where one works? How to produce will also depend on the amount of each factor that is available.

Factors Determining How to Produce

The next problem is determining how to go about producing those commodities chosen production. The decision to produce involves determming the resources to be used to produce these commodities and the production techniques or methods to be used.

The type of economic system adopted tends to answer the above questions.

While private individuals and private resources are mainly used in a capitalist or free enterprise system, in a socialist or centrally planned economic system, production is carried out by the state and public resources are used.

Two main methods of production labour intensive and capital intensive, can be adopted. Labour intensive method involves the use of more labour and little capital while capital intensive method uses more capital like machines and less Iabour.

The decision here depends on the cost of one input In relation to the other. Economists prefer that the least cost method should be adopted.

3. For Whom to Produce?

The society has to solve the problem of distribution. Who shall enjoy what has been produced? Should there be any preferential treatment in distribution, widening or closing the gap between poor?

Factors Determining For Whom to Produce

The next basic economic problem is the determmatlon of who will enjoy the goods and services produced. Irrespective of the type of economic system adepted, goods and services are produced mainly to satisfy human wants.

However, the economic system a society adopts has a lot to do with the enjoyment of goods and services. While one’s Income determmes the type and quantity of goods and services he enjoys in a capitalist system, in a socialist system goods and services are distributed and enjoyed according to needs and individual’s contributions.

4. Where to Produce

The society will also decide the place where production will take place. The economic decision here should be based on the average cost of production at each location.

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