The scarcity of resources gives rise to various economic problems which have to be solved by economic system if it is to fulfill its purpose. The basic problems are:
a) What to produce? b) How to produce?
c) For whom to produce? d) What provision should be made for
economic growth?
What to produce: The
problem ‘what to produce’ is the problem of choice between commodities.
Scarcity of resources does not permit production of all goods and service that
people would like to consume. Besides, all the goods and service are not
equally valued in terms of their utility by the consumers. This is why the
problem of choice between the commodities arises. Production possibility curve
helps to analyze the problem.
How to produce: This means what combination of resources society decides to produce goods. Economy aims at using the available resources in the most efficient method. Isoquant curve helps to take the decision.
For
whom to produce: This
implies how the national product is to be distributed among the members of the
society. Economic problem solutions depend on distribution process.
What
provision should be made for economic growth: Both an individual
and a society would not like to use all its scarce resources for current
consumption only. This is because if all resources are used for producing
consumer goods only and no provision in terms of allocating some resources for
investment, that is, for production of capital goods is made, the future
resources or productive capacity would not increase.