#economics #Thenatureoftheeconomicproblem

The nature of the economic problem: fi nite

resources and unlimited wants

In every country, resources are limited in supply and decisions have to be made

by governments, fi rms (businesses) and individuals about how to allocate scarce

resources to satisfy their unlimited needs and wants. This is known as the basic

economic problem, which exists in every economy: how best to allocate scarce

resources to satisfy people’s unlimited needs and wants. Essentially, economics is

the study of how resources are allocated to satisfy the unlimited needs and wants

of individuals, governments and fi rms in an economy.

The three main economic agents (or decision makers) in an economy are:

» individuals or households

» fi rms (businesses which operate in the private sector of the economy)

» the government.

The three basic economic questions addressed by economic agents are:

1 What to produce?

2 How to produce it?

3 For whom to produce it?

Firms and individuals produce goods and services in the private sector of the

economy and the government produces goods and services in the public sector.

For example, the government might provide education and healthcare services

for the general public. All economic agents (governments, fi rms and individuals)

produce and consume goods and services.

Goods are physical items that can be produced, bought and sold. Examples are

furniture, clothing, toothpaste and pencils. Services are non-physical items that

can be provided by fi rms and paid for by customers. Examples are haircuts, bus

journeys, education, concerts, telephone calls and internet access.

Needs are the essential goods and services required for human survival. These

include nutritional food, clean water, shelter, protection, clothing and access to

healthcare and education. All individuals have a right to have these needs met

and this is stated in Articles 25 and 26 of the United Nations Universal

Declaration of Human Rights, drafted in December 1948

Wants are goods and services that are not necessary for survival but are human

desires — that is, things we would like to have. Wants are unlimited as most

people are rarely satisfi ed with what they have and are always striving for more.

Wants are a matter of personal choice and part of human nature.

World Bank fi gures suggest that over 3 billion of the world’s inhabitants live on

less than $2.50 per day and more than 1.3 billion live in extreme poverty (less

than $1.25 a day). These fi gures suggest that their basic needs are not being met.

In contrast, the ten richest people on the planet have wealth equivalent to the

poorest half of the world’s population. The study of economics can help to explain

why this happens and offer possible solutions to the basic economic problem.

Economic goods and free goods

An economic good is one which is limited in supply, such as oil, wheat, cotton,

housing and cars. It is scarce in relation to the demand for the product, so human

effort is required to obtain an economic good.

Free goods are unlimited in supply, such as the air, sea, rain water, sunlight

and (to some extent) public domain webpages. There is no opportunity cost in

the production or consumption of free goods.

A free good is not the same as a good that is provided without having to pay

(such as education or healthcare services provided by the government). The latter

has an opportunity cost (the money could have been spent on the provision of

other goods and services) and is funded by taxpayers’ money.