The Basic Economic Problem
Countries
have a limited amount of resources. They are not enough in supply to produce
all the goods and services required to satisfy the unlimited wants of people.
Therefore economic agents have to make choice which results in an opportunity
cost.
Resource Allocation
It
refers to the apportionment of resources among the competing uses. Resources
can best be allocated by finding an appropriate solution for each of the three
questions of allocation.
Questions of Allocation
The
following questions are common for all countries alike.
1.
What to produce?
Countries
can not produce all the goods and services demanded by their people. They need
to decide what goods and services (and in what quantities) should be produced
by using the available resources.
2.
How to produce?
There
are two methods of production a firm can employ in its production process.
a.
Labour Intensive
Method: Using more labours in the production process.
b.
Capital Intensive
Method: Using more capital in the production process.
3.
For whom to
produce?
The
distribution of goods and services is based on the personal real income. The
higher the income, the larger the share of the national output consumed.
Therefore, we need to decide how the total real income should be shared out.
Conflicts of Interest
Resources are scarce.
Most of them are non-replaceable. It indicates that utilization of more
resources at present will reduce the supply of these resources for future
consumption.
At the same time, we need
to take into account the trade-off between Consumer goods and Capital goods. An
increase in the production of capital goods at present will reduce the current
production of consumer goods but will increase the future output of the latter.
A country can produce Cp1 capital goods and Cn1
consumer goods with its available resources. But, an increase in the output of
capital goods from Cp1 to Cp2 would lead to a fall in consumer goods from Cn1 to
Cn2.
