We all know that human wants are unlimited, but the means to satisfy these wants are limited. Therefore, all the wants cannot be fulfilled. An economic problem means the problem of making choices occurs because of the scarcity of resources. It arises because people have unlimited wants, but the means to satisfy them are limited.
The question of choice, as an individual, also applies to society as a whole. Thus, for an economy, the economic problem is the problem of resource allocation. If the means are not scarce, then there is no problem.
Therefore, it can be said that economic problems are the problem of choice involving satisfaction of unlimited wants out of limited resources having alternatives uses.
According to Oskar Lange, “Science of managing scarce resources in human society.”
According to Milton Friedman, “An economic problem exists whenever scarce means are used to satisfy alternative ends.”
Causes or Reasons for Economic Problems
The main reasons for the existence of economic problems are as follows:
- Scarcity of Resources: Resources which include land, labour, capital, etc., are inadequate compared to their demand and the economy cannot produce all that people want. This is the fundamental cause of the existence of economic problems in all economies. Scarcity is universal and applies to every individual, organization, and country. If the resources were not scarce, there would have been no economic problems.
- Unlimited Human Wants: Human wants are unlimited and unending. In other words, humans can never be satisfied. When one want of a person is satisfied, a new want emerges. Wants are endless and constantly keep on multiplying, and cannot be met due to limited resources. Human wants also vary in their priority, i.e., not all wants are of equal intensity. For every individual, some wants are more important and urgent than others. For this reason, people allocate their resources in order of preference to satisfy some of their wants. If all human wants were of equal importance, then it would have become impossible to make choices.
- Alternate Uses: Resources are scarce and can be used for different purposes. Therefore, it is important to make choices between resources. For example, sugarcane can be used in various ways- in industries, it is used to make rum, sugar, biofuel, etc. Its by-products are used to make molasses, bagasse, etc. Therefore, the economy has to make choice between the alternative uses of the given resources.
Resources Vs Human Wants:
Resources: To satisfy wants (economic), resources are required to produce goods and services. Resources can be either man-made or natural. These resources can be further classified as capital, labour, land and entrepreneurship. For example, For the production of grain, we use land, labour, etc.
Features of Resources:
- Resources are scarce as their supply is limited in relation to demand.
- Resources have alternative uses.
Human Wants: Human wants can be classified as economic and non-economic wants. Economic wants are those wants which can be satisfied by goods and services, and for that money is required. For example, in order to travel, an individual may have to purchase a car, which requires money. On the other hand, non-economic wants are those wants which cannot be purchased from the market. For example, Air is needed to breathe, and it cannot be purchased from the market.
Features of Human Wants:
- Human wants are unlimited and can never be fully satisfied.
- Human wants differ in priorities.
As we know, human wants are unlimited and resources to satisfy these wants are limited. We cannot satisfy all of our wants by using these limited resources. And when our wants are not satisfied, it leads to dissatisfaction. Therefore, an economy has to deploy these resources in such a manner that maximum satisfaction can be provided. An economy has to make choices as per the priority of wants. Essential wants should be preferred over non-essential wants.