Three Basic Problems.
People have limited means to satisfy unlimited wants so they are forced to choose. The problems of choice are essentially problems of allocation. People must decide how to allocate resources to different uses and them how to allocate the goods and services produced to the individual members of society. There are three fundamental choices to be made.
1.Which goods shall be produced and in what quantities?
This problem concerns the composition of total output. The community must decide which goods it is going to produce and hence which it is not going to produce. Having decided the range of goods to be produced, the community must then decide how much of each good should be produced. In reality the choices before a community are rarely of ‘all or nothing’ variety. They usually take the form: more of one thing and less of another. The first and major function of any economic system is to determine in some way the actual quantities and
varieties of goods and services which will best meet the wants of its citizens.
2. How should the various goods and services be produces?
Most goods can be produced by a variety of methods. Wheat can be grown by making use of much labour and little capital, or by using vast amounts of capital and very little labour. Electrical appliances can be made by using large and complex machines operated by relatively few semi – or unskilled works. Alternatively they might be produced in hosts of small workshops by highly skilled technicians using relatively little machinery. Different methods of production can be distinguished from one another by the differences in the quantities of resources used in producing them. Economists use the term capital-intensive to describe the alternative methods just outlined. The total output of the community depends not only on the total supply of resources available but on the ways in which these resources are combined together. A community must make decisions on the methods of production to be adopted.
3. How should the goods and services be distributed?
This is the third function which an economic system has to perform. The total output has to be shared out among the members of the community. The economic system has to determine the relative sizes of the shares going to each household. Should everyone be given an equal share? Should the output be shared out in accordance with people’s ability to pay the price, or should the shares be decided according to tradition and custom?
These basic problems are common to all societies no matter what level of economic development they have reached. The methods of solving them will be different from one society to another but the problems are common in all societies.