Economic problems of every society

Economic System refers to the system by which a nation organizes the ownership, control and allocation of her resources in a bid to achieve national objectives.  It is the system by which answers are provided to the fundamental economic questions of what to produce, how to produce and who gets what is produced.

Basic Economic Problems of Society

The basic economic problems of society arise because of scarcity of resources. The way a society organizes itself to solve these problems determines the type of economic system it will practice. These problems to be examined are:

(i) What to produce

(ii) How to produce

(iii) For whom to produce

(iv) Efficiency of resource use

What to Produce

The question of what to produce arises because resources are scarce. Since we cannot have everything we want, we have to set our priorities. In so doing, individuals, firms and the government are faced with the problem deciding on the type of goods and services to produce for society. This is what determines the allocation of productive resources in an economy. If more resources are to produce a commodity, fewer resources will be available for production of other commodities. The type of commodities produced depends on the needs of the society and the available human and material resources.

How to Produce

This problem arises because society and producers have to decide the method or technique of producing a particular commodity. The technique adopted depends on the resources available to the society. The country can employ labour or capital intensive techniques of production. If it is labour intensive, more labour and less machines will be used. If it is capital intensive, more machines and less labour will be used. The technique to choose depends on factors such as the state of development in the country, employment level, government objective etc. Whichever method is employed, it depends on the cost per unit of output produced. Problem of technique of production are dealt with in the theory of production.

For Whom to Produce

This deals with the problem of distribution. How the available goods and services are to be allocated among the various members of the society? In other words, it involves the question of what proportion of the national product should go to the various individuals and groups in society to ensure equity. Do we produce for the children, the working population, the rich, or the aged?

How the Resources Can be Equitably Distributed and Efficiency of Resource use

This deals with the distribution system of the economy. Society has to ask the question “How efficiently are available resources being used”? In addition, is the society being used to full or partial capacity? In addition, the society determines whether available products are being efficiently allocated among consumers to maximize social welfare. Each society tries to reduce the level of unemployment (under-utilization) of resources. If resources are efficiently used there will be increase in the production of goods and services and make everybody better off. The question of efficiency of production and allocation of resources comes under welfare economics.