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Economic problem
From Wikipedia, the free encyclopedia
The basic economic problem is a term used in economic theory. It asserts that there are limited resources for infinite human wants or scarcity. It involves what goods and services an economy should produce, for example should the emphasis be on public services, housing, agriculture or manufacturing. It also determines how the goods and services should be produced, capital or labour intensive and the efficiency.
There are four reasons why wants and needs are virtually unlimited:
- Goods eventually wear out and need to be replaced.
- New or improved products become available.
- People get fed up with what they already own.
- With an increase in salary the expectations of the consumer rise.
Commodities (goods and services) are created by utilisation of resources. The resources shown below are sometimes called factors of production.
Different types of resource
| Type | Description | Reward |
|---|---|---|
| Land | All natural resources | Rent |
| Labour | the physical and mental work of people | Wages |
| Capital | All man-made tools and machines | Interest |
| Enterprise | All managers and organisers | Profit |
In types of commodity a free good is available without the use of resources. For example, there is zero opportunity cost for air. An economic good is a commodity in limited supply. However the difference between a free good and an economic good alters with the opinion of the economist. For example within the Amazon Rainforest rainwater is not considered as scarce because it is in mass abundance, but fresh water is considered as scarce because it is hard to come by.
Expenditure on producer or capital goods is called investment.
The economic problem refers to the scarcity of commodities. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
Society has to decide which commodities to make. For example, do we make missiles or hospitals? We have to decide how to make those commodities. Do we employ robot arms or workers? Who is going to use the goods that are eventually made?
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