Due to a lot of controversy about the universal definition of economics, the subject matter and basic economic problem have also been differently defined. Adam Smith focused on the nature and the causes of the wealth of nations, whereas Alfred Marshall emphasized the examination of individual and social action which is connected with material requisites of well-being, and Lionel Robbins presented the issue of relationship between needs and scarce resources with alternative uses. Some definitions of economics are too wide and some are too narrow. That is why, economists these days do not give effort to define economics rather they focus on identifying and solving basic economic problem.
Fundamental Economic Questions
How a nation economically operates and what kind of problems should it face are the subject-matters of economics study. Economist have asked many questions from time to time, but when we try to link all questions we come to know that All questions arise because of the basic problem of scarce resource and unlimited wants.
The following are some major and fundamental economic questions:
- What is the capacity of productive resources to produce goods with in an economy?
- What production methods are carried out for the productions of various goods and services?
- How the produced goods are distributed among the people?
- Are the productive resources mobilized efficiently?
- Are the available resources are fully utilized or employed?
- How the economy’s productive capacity is being changed? (Increasing, declining or static)
All capitalist, socialist or mixed economies have to go through production, distribution, and resource utilization process. So that an economy tries to answer above fundamental economic questions.
Basic Economic Problem
Economic questions and Economic problem are same in the meaning, but latter was explained in broader prospective. That is, answering the fundamental economic questions is considered as fundamental economic problem.
It is well established that economic problem arise because of scarce resource and unlimited desire. For the efficient use of these scarce resource, efficient production, distribution, and consumption mechanism should be carried out. On the basic of thoughts of various economists, existing basic economic problems are identified as follows:
1. The Problem of Allocation of Resources
This is the first basic problem that arises in the economy. The problem of resource allocation arises because of scarce resources and an economy must decide which and how much goods and services are to be produced and accordingly have to allocate the available resources.
Due to the scarcity of productive resources, it is impossible to produce all the demanded goods and services. An economy should allocate these resources according to the priority.
If the economy decides to produce ‘A’ goods in a larger quantity, it will then have to withdraw some resources from the production of other goods. This is known as the problem of allocation of resources.
2. Choice of a Production Method
Making choice between labor-intensive and capital-intensive production method is another basic economic problem.
Labor-intensive production method use more labor and less capital or technology, whereas capital-intensive use less labor and more technology.
For example, production of cloth using hand loom is labor-intensive; on the other hand, production with automatic looms is capital-intensive.
Which production method should be carried out is to be decided and this decision is taken on the basis of availability of resources and the price of factors of production/resources.
3. The Problem of Distribution of National Product
The problem of distribution of national product is linked with problem of income distribution because equal distribution of income results equal distribution of national product. For example, people with low income have less purchasing power so that they obtain small portion of output, whereas rich people with high purchasing power can hold and obtain larger share of output.
While talking about the source of income, there are mainly following two activities:
- Doing work,
- Lending of land, capital.
It means land, labor, and capital are the factors of production and they receive prices or reward for their contribution. Reward distribution of factor of production is considered as income distribution, and income distribution is liked with the problem of national product distribution which is the subject matter of the Theory of Distribution. (Without consideration of personal property holding)
4. The Problem of Economic Efficiency
Efficiency on the production and distribution of goods and services is another basic economic problem. If there is no chance to increase in quantity production by rearrangement of productive resources, the production process is supposed to be efficient.
If there is no chance to make any individuals better off without making any other person worse off is known as economically efficient distribution process.
In the microeconomics studies, how the efficiencies of firms are achieved under different market conditions like perfect competition, monopoly, monopolistic and oligopoly is the economic efficiency problem of economics.
5. The Problem of Full Employment of Resources
In economics, full employment of productive resources is one of the desired condition. In order to fulfill unlimited wants and desires of individuals and society, scarce resources are to be fully employed.
On the contrary of prosperity situation, some factors of productions remain idle in the depression situation of economy. For example, about 25 percent of labor force in the USA, Britain and other industrialized countries were remained unemployed during the depression of nineteen thirties.
To solve this situation, J.M. Keynes put forward theory of employment, interest, and money in 1936 in his book “General Theory of Employment, Interest and Money‘. Utilization of all production resources without leaving them idle is matter of concern in the economy.
6. The Problem of Economic Growth
Economic growth is the increment in production capacity of economy. If there is positive economic growth, more goods and services will be produced and living standards of people can be improved.
What is the appropriate economic growth rate for a particular country is still the matter of discussion. But it is well established that higher economic growth rate necessary for least developed and developing countries and fewer is enough for developed countries.
Conclusion
Economics is a part of study which deals with basic economic questions. At first it studies the production and distribution of goods and services. Then it examines how efficiently the productive resources are used during production and distribution process. Ultimately, it is about increasing production capacity of economy and improving satisfaction of people.
While solving economic problems, economists search for an issue in the production and distribution process, efficiency of used resources, and employment of resource. That is why all above mentioned questions and problems are regarded as fundamental questions and basic problems of economy.
That is defining economic problem and solving them is continuous process but the basic economic problems remains same because these are bases of economics study.
FAQ
What is the reason behind 1930 depression?
According to J.M. Keynes, the fall in aggregate demand and supply of goods and services was the main reason behind 1930 depression. This explanation is known as Keynesian Explanation.