Basic Economic Problem
Simply put...
The basic economic problem stems from this: Resources are finite, but human wants are infinite. For example, a farmer may want to plant an infinite amount of crops to earn money, but he only has a finite amount of crops to grow stuff, for resources are not infinite. Economics comes from the Greek expression “oikon nemein” - “one who manages and administers all matters relating to a household”. Economics has now evolved into referring to management of society’s scarce resources.
Technical terms you need to know…
People want different things.
Goods: Physical objects (food, clothing, house, books, iPhones, Tesla)
Services: Non-physical stuff (education, healthcare, entertainment, travel, insurance)
But no one can have them all, because there isn’t enough resources to make everything.
For example, there will never been enough diamond to make windows for every house, nor will there ever be enough oyster to make sure everyone can have a plateful of seafood every night.
Resources: The stuff we consume to produce the goods and services wanted by people.
Choices…
Remember, Economics is the study of choices. Because you don’t have everything, you must make sacrifices and choices.
All economic systems must answer these three questions:
what to produce: What goods do I make? how to produce: How do I make those goods?
whom to produce for: Whom do I make those goods for?
Notice, the last question is about resource distribution (how much of resources the population receives), while the first two are about resource allocation (how are resources used).
For example, let’s take Country A:
What should it produce? Wool, oil, or machinery?
How should I produce it? Manual labour or machines?
Whom should I produce it for? The population, farmers, or exports, for people in country B?
All these are just examples and are not conclusive; however, the production, distribution and allocation of resources are the main scope of economics.
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