Why Do Economic Problems Arise?


Economics is about how people make decisions given their limited resources. The decisions are taken with regard to the basic economic activities such as production and consumption of goods and services and saving and investment.

The economic problem arises in every economy due to –

  • (a) Unlimited wants
  • (b) Limited resources
  • (c) Alternative uses of resources.

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Unlimited Wants

Human beings are required to satisfy their basic needs for their survival. For example, a person needs food, water, clothing and shelter in order to survive. These are the basic needs of a person.

However, no person would like to just satisfy only his/her basic needs, if he/she could improve his/her life. People, by nature, want more than what they just need for survival. If one want is satisfied, many others crop up and this goes on endlessly.

Let us understand this through an example. Suppose Neha wants some food, a blouse, utensil for her mother, sweets for her brother, and bangles. These may be only a few of the many things that Neha may like to have if she had some money. This example shows that an individual’s wants are unlimited.

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Limited Resources

Let us say that all the things said above are available at some price. Now suppose that Neha has only ₹ 1000 with her to spend. Let food is available at ₹ 150, a blouse costs ₹ 200, value of utensil is ₹ 600, a packet of sweet costs ₹ 200 and a set of bangles is available at ₹ 50. All these taken together would cost Neha ₹ 1200. Since she has only ₹ 1000 with her, Neha has to adjust her purchases accordingly. Here, we say that the means to satisfy Neha’s wants are limited to ₹ 1000. People may have high or low-income but not unlimited income. Hence, resources (or income) available to consumers are scarce or limited.

Resources also include factors of production – land, labour, capital and entrepreneurship. These resources are not available in abundance in this world. They are scarce or limited. Scarcity means that the demand for the resources is greater than their availability.

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Alternative Uses of Resources

The above example also highlights another important fact that a resource can be used in different ways. In Neha’s case, she can use her ₹ 1000 to buy some other items. Similarly, all factors of production can be put to alternative uses. For example –

  • A piece of land can be used to do farming, build a factory, develop a school or build a hospital.
  • A labour can be used to plough a field, to make baskets or to sell vegetables.

Hence, we see that resources have alternative uses.

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From the above discussion we can see that wants are unlimited but resources (to satisfy the wants) are limited which happens to be the basic economic problem faced by all economies. Also resources may have alternative uses.

This basic problem exists in every economy – whether rich or poor; developed or developing.

Scarcity of resources also leads to choice. In our example, Neha has only ₹ 1000 to spend but she wants to buy many things which was limited. So she must choose what she wants. In this way a consumer tries to solve the economic problem of unlimited wants and limited resources. Similarly producers also face the economic problem as they need to decide as to which alternative use should they put their scarce resources.

Suppose resources were not limited. Would it still lead to the economic problem?

The answer to this question is that if resources were not scarce they could be used to satisfy all wants. Hence, the basic problem of scarcity and choice would not arise. Scarcity of resources results in people making decisions about how best they would like to use these limited resources. Making the best use of resources is termed as economizing of resources. Economizing of resources does not mean being miserly about using resources, but using resources judiciously so that maximum benefit can be obtained from the scarce resources.

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Bibliography : NIOS – Economics

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