Economic problem arises from scarcity of resource .Every economy faces scarcity of resources because their wants are unlimited and their resources (means) are limited. Therefore, economic problem is the problem of economising scarce resources. It means making the best use of the available resources.

Scarcity of resource is a feature of all societies from the richest and to the poorest. Scarcity of resources does not mean that rare and small quantity of resources, it simply means that it is not enough to satisfy all wants at once. That is, resources are scarce in relation to their demand. The economic resources land, labour, material, fuel, machinery etc which are needed to produce goods and services are limited in supply. However over technological progresses enable us to produce more things with a given resources. However, the problem is that our wants increase faster than our ability to produce goods and services.

Unlimited wants and limited income force us to choose .When we make a choice something has to be given up or forgone .Whatever we forgone is described as opportunity cost. For example, Mrs. White has enough money to buy petrol or a meal in a restaurant. She chooses to buy the petrol .The opportunity cost of the petrol is the meal that she has to forgone. Therefore, opportunity is the cost of the best alternative forgone. Or opportunity cost is the cost of choice.

All economies have to deal with the same basic economic problem-they have limited amount of resources and unlimited wants. So every economy has to decide how these limited resources are to be used .Economists describe this as a problem of resources allocation. This is also called the central problem of an economy.

The problem of allocation of resources must find ways of answering the following questions.

What to produce?
Resources are limited and our wants are unlimited .Therefore, we must choose what commodity should produce at first. The economy must discover what things people really want. Having decided on what produce we have also to decide the quantities in which the selected goods and services have to produce.

How to produce
This question relates to the choice of techniques of production.Technologically,there are various ways of producing a given out put.For example cloth can be produced on hand looms or powerlooms. If hand looms are used,relatively more labour and less capital is employed.This is known as labour intensive method. In the case of power looms,more capital and less labour are required.This is known as capital intensive .The choice of method will depend on the quantity of goods to be produced and the availability of labour and capital.However,we selected one that the maximum output can be produced with the given resources .

For whom to produce
For whom to produce is the problem of distribution of goods and service .In brief, the question is how the product is allocated among the four factors of production. The underlying issue here is the functional distribution of output.
In addition to the above problem, there are other two important economic problems faced by all economies- the problem of full utilisation of resources and problem of growth of resources

PPC is the graphical representation of the basic economic problems. It shows the different combinations of the commodities that an economy can produce with full use of resources and state of technology .To understand its construction; let us consider the information given in a table

Production possibilities Shoes (in thousands) Shirts (in thousands)


012345 151412950

The table shows that different combinations of shoes and shirts that an economy can produce with its given resources and technology .It is assumed that all resources are fully employed.If all the resources are devoted to the production of shirts ,a maximum of 15 thousands shirts can be produced .Similarly,if all resources are used to produce shoes,5 thousand shoes can be produced.With these two extreme production possibilities, there are four different possibilities such as B,C,D and E, giving different combinations of shoes and shirts.The economy can choose any one of the combinations.


This curve slopes downwards, which means that in a full employment economy , to produce more of one commodity, only less of another can be produced.This means that the resources which previously used for the production of shirts are now being employed to produce shoes.hence ,the production possibility curve is also called transformation curve.

A production possibility is also called a production frontier, since it shows the maximum amount of the commodities that can be produced by the full and efficient use of the given resources and technology. For example, the point K in the diagram is outside the production frontier. We cannot produce a combination of goods depicted from this point. This is the problem of growth of resources. But, at the point U which lies inside the curve, the economy is producing less of shoes and shirts. This is showing that the available resources are not fully and efficiently utilized.

The production possibility curve is summarized as the following.

  • The points on the production possibility show the problem of resources allocation.
  • The points below that of the PPC show the problem of fuller employment of resources
  • Points above the PPC the problem of growth of resources

Prepared by Mr. Anilkumar, HOD Dept. of Humanities, SEMS

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