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Economic Problem Essay

3277 words - 14 pages

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The economic problem, sometimes called the basic, central or fundamental economic problem, is one of the fundamental economic theories in the operation of any economy. It asserts that there is scarcity, or that the finite resources available are insufficient to satisfy all human wants and needs. The problem then becomes how to determine what is to be produced and how thefactors of production (such as capital and labor) are to be allocated. Economics revolves around methods and possibilities of solving the economic problem.
In short, the economic problem is the choice one must make, arising out of limited means and unlimited wants.
Contents  [hide]  * 1 Overview ...view middle of the document...

For example, say that we have isolated two goods, food and clothing, and we look at what would happen if there was increased production of food (there is an opportunity cost of clothes so clothes would go down as food goes up), this varies according to what effects there are including new technology and new resources.
[edit]Needs
Needs are material items people need for survival, such as food, clothing, housing and ware. Until the Industrial Revolution, the vast majority of the worlds population struggled for access to basic human needs.
[edit]Wants
While the basic needs of survival are important in the function of the economy, wants are the driving force which stimulates demand for goods and services. In order to curb the economic problem, economists must classify the nature and different wants of consumers, as well as prioritize wants and organize production to satisfy as many wants as possible. One assumption often made in mainstream neoclassical economics (and the methods which attempt to solve the economic problem) is that humans inherently pursue their self-interest and the market mechanism best satisfies the various wants different individuals might have. These wants are often classified into individual wants, which depend on the individual's preferences and purchasing power parity, and collective wants, those of entire groups of people. Things such as food and clothing can be classified as either wants or needs, depending on what type and how often a good is asked for. Wants are effective desires for a particular product, or something which can only be obtained by working for it.
[edit]Choice
The economic problem fundamentally revolves around the idea of choice, which ultimately must answer the problem. Due to the limited resources available, producers must determine what to produce first to satisfy demand. Consumers are considered the biggest influences of this choice, and the goods which they want must also fit within their budgets and purchasing power parity. Different economic models place choice in different hands.
* Socialism asserts that producers (workers) should have some control over the decisions that affect their welfare in the workplace and on the governmental level, which cooperatively formulates economic plans for economic decisions regarding the allocation and use of capital goods. Socialist systems that utilize the market for this role are termed market socialism.
* The idea of State socialism argues that most or all major economic choices (regarding production, allocation of inputs and distribution of output) should be made through central planning by the government. Only by constructing a cohesive plan that takes the good of everyone into account, so the idea states, can the best allocation of resources be achieved. (Also see Planned economy.)
* Communism refers to a stage of development where the productive forces are advanced to such a degree that it solves the economic problem, insofar as needs are...

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