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The central economic problem is about scarcity and choice

After studying this module, you should be able to answer the

following questions:

1. What is the central economic problem faced by all individuals and societies?

2. What are the three fundamental questions of economics?


3. Why is it essential for people to make economic decisions?

4. What is meant by ‘opportunity cost’? How is it elevantr when people make economic choices?


Human wants are virtually unlimited whilst the resources to satisfy our wants are limited. The most pressing wants are food, housing, clothing and warmth. They have to be satisfied first. Advances in technology, however, have added new wants and brought about new ways of satisfying existing wants. For example, our wants for cars and television sets were unknown to previous generations and the wants to travel, regarded as difficult in the past, can be satisfied easily because of many different types of transport.

At any time people in different countries of the world can produce only a limited amount of goods and services because the available resources are limited, or scarce. These resources or factors of production as they are often called are of three types:

Labour: all forms of human input, both physical and mental,into production. The labor force is limited both in number and in skills.

Natural resources: land and raw materials. They are inputsinto production that are provided by nature. The world’s land area is limited, as are its raw materials.

Capital: all inputs that have themselves been produced, e.g.factories, machines, transportation and other equipment. All of them are also limited. Moreover, the productivity of capital is limited by the state of technology.

Three fundamental questions of economics arise becauseof scarcity and the need to choose between alternative uses of scarce resources.

1. What goods and services are going to be produced? For example, how many cars, how much wheat, how many rock concerts, how mush education, etc. The answer depends not only on resources but also on the needs: in Finland consumers need mare warm clothes because of the climate. In China consumers need more rice because it is traditional everyday food there.

2. How are things going to be produced? Resources can be used in different proportions. Labour-intensive production versus

capital-intensive production: In Brazil maize is grown with a lot of labour and limited capital, and in the Netherlands tomatoes are grown with a lot of capital and limited labour. In India electronic devices are produced in small workshops with relatively more labour than capital, and in Germany electronic goods are made with more capital and less labour than in India.

3. For whom are things going to be produced? How will the nation’s income be distributed? Historically there have been various answers: according to traditions and customs: in the primitive society hunters got the best food; according to the principle of equality: in the former communist-block countries; according to people’s ability to pay: in contemporary Russia. In answering this question, modern economics is more focused on the following aspects of the problem: What will the wages of farm workers, builders, accountants, teachers be? How much will pensioners receive? How much will go to shareholders?


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Key words. Basic concepts of economics | Choice and opportunity cost
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