Every economy faces the problem of choice. The reasons behind this problem are –

● Unlimited human wants

● Limited resources to satisfy the human wants

● The available resources can be put to alternative uses.

Therefore, we can say there would have been no problem if the scarce resources would have had single use. The real difficulty arises due to alternative use of resources.

So, the economic problem is mainly the problem of choice making or decision making. These problems are very common to every economic system and are known as “central problems of an economy”.

Basic Economic Problems

1) What to produce - The first basic problem for every economy is “What to Produce”

The requirements of every economy are unlimited; the resources are capable of being put to alternative uses. So the economy will have to make a choice between different commodities.

The economy has to decide between the capital goods or consumer goods. The economy may produce more of capital goods or consumer goods; it depends upon the urgency of want.

Eg - The available quantity of steel in an economy may be used for producing –

Consumer Goods - Automobiles, Washing Machine, Refrigerators

Or

Capital Goods - Machineries

2) How to produce - The other related problem is the problem of choice of technique i.e. “How to Produce”

There are two techniques of production -

• Labour intensive

• Capital intensive

Use of labour intensive technique means economy chooses to make better use of its available manpower.

Use of capital intensive technique means the economy is anxious to build up the infrastructure for rapid economic growth

3) For whom to produce - It is the problem of distribution of income between different groups in society as well as related with for when to produce present or future. It depends upon the monetary and trade policy of the economy.

If the economy produces capital goods using capital intensive technique it means it is producing for future generation.

Therefore, the basic economic problem of any Nation is to make choice among alternative uses of scarce resources. The ultimate goal of any Nation should be to make a choice among the available alternative in such a way that maximum satisfaction could be obtained from limited resources.