All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited. Wants are defined as the material desires of an individual or the community. They are items that provide some pleasure or satisfaction when consumed. There are two types of wants:
Individual wants are the desires of each person. What is wanted will depend on personal preference. Factors such as income affects the ability of an individual to satisfy his/her need. The less income that a person has, the fewer wants they will be able to satisfy, vice versa applies to people with high incomes.
Collective wants are the wants of the whole community. For example, in Australia, we have many collective wants; local government provides collective wants such as parks, libraries and local sporting facilities. State governments provide most wants for the wider community such as hospitals, schools and a police force, while the Federal government satisfies the wants of the entire nation such as a defence force.
In addressing the economic problem, all economies must attempt to answer the following questions:
What to produce? - Because of limited resources, no economy can satisfy all individual and collective wants.
How much to produce? – To allocate limited resources efficiently and maximise the satisfaction of wants.
How to produce? – Looking for the most efficient method of production that uses the least amount of resources.
How to distribute production? – Deciding on the distribution among the population. For example people who have higher incomes can afford to buy more goods and services than lower people and therefore receive a bigger share of production
As a result of individuals, businesses, and governments all face the economic problem. In the process of making choices, all must weigh up a range of factors relating to short and long term objectives.
Individuals must make choices between spending and saving. In which spending satisfies present wants while savings raising future living standards. For example which may choose to go without a holiday and instead purchase a car. Giving up habitual needs e.g. purchasing coffee in the morning represents the opportunity cost an individual faces. In long term buying a car improves one’s transport as they will not have to pay for fares. Additionally choices by an individual are shaped by a variety of factors, including age, income, expectation, future plans and family circumstances. The decision to undertake further education may involve forgoing income for several years, although it will be rewarded with higher income in the longer run.
Businesses must make choices about price, how much to produce, what resources to use and how to manage their employees. Businesses have a limited amount of labour, capital and…