Economic problem

ECONOMY AND ECONOMIC PROBLEM

WHAT IS AN ECONOMY?

MEANING OF AN ECONOMY:-

In economics the world economics refers to the production activities of a well defined area or a region. It may be a village, a district, a city, a country or the whole world. For example when we refer to the Indian economy, we actually refer to the whole collection of farms, factories, shops, offices, banks, colleges, theaters, TV channels, and many more.

Production activities are carried out by the people to earn livelihood. The earnings are in the form of wages, rent, interests and profits.

On the basis of above description, economy can be defined as follows:

Economy means the whole collection of production units operating in  a defined area or region by which people of that area get their living.

FUNCTIONING OF AN ECONOMY

An individual needs a large number of goods and services to survive and enjoy life. No individual can ever produce on his own all what he needs. He can ever produce on his own all what he needs. He can produce one or just a few things he needs but for most of the other requirements he has no option but to depend on others. A farmer producing wheat may be self-sufficient in wheat but has to depend on other producers for other food items, clothes, utensils, education, seeds, fertilizers, tractors, etc.

The system of selling goods for money and then using money to obtain other goods is called 'exchange' and the economy is called the exchange economy.

Money and exchange are thus two vital aspects of the functioning of today's economy. Money facilitates exchange and exchange facilitates to obtain goods and services one does not produce. Obtaining goods and services for satisfying wants is 'consumption'. Obtaining goods needed to undertake production is called 'investment'.

THE BASIC PROBLEM OF AN ECONOMY

The goods and services usable to carry out production are called 'resources'. These are classified into natural resources, human resources, man-made resources and organisation. These are also called land, labor, capital and entrepreneurship respectively. Resources are also referred to as factors of production. The resources are never enough to satisfy the never ending wants. This is what is meant when it is said that resources are scarce. The scarcity is in relation to the quantum of wants.

Since the resources are scarce, the people have to be choosy in using the available resources. They have to find ways and means to economize i.e. use resources in the best possible manner. How to make the efficient use of the available resources, is the basic problem of an economy.

THE ECONOMIC PROBLEM AND WHY DOES IT ARISE?

Meaning of Economic Problem 

Economic problem is essentially the problem of which alternative to choose from among the available economic alternatives.The problem is that if one alternative is chosen the other alternative cannot be availed. For example given income if a person decides to buy more of one good, he must at the same time decides to buy less of some other good. You cannot watch TV and study at the same time. One has to make choice between available alternatives. ''which alternative to choose'' is the economic problem.

WHY DOES AN ECONOMIC PROBLEM ARISE?

THE ROOT CAUSE

The root cause is scarcity. Scarcity is a relative term. It cannot be defined in isolation. There is scarcity of resources in every economy. Scarcity here implies that the society cannot get all what it wants from the available resources can satisfy. Therefore one has to make a choice as to which one to satisfy. Scarcity gives rise to the act of choice. The problem is that which alternative to choose. 

CAUSES OF AN ECONOMIC PROBLEM

(i) Unlimited wants

Wants of human beings are unlimited. This is the basic fact of life and human nature. We are never satisfied. Some wants are everlasting, like the need of food, clothing and housing. Some wants grow as income rises. There is never ending cycle of rise

 in income and rise of wants. Wants keep growing.

(ii) Limited wants

There is limited amount of resources available in the society, every society. Resources are land, labor, capital and entrepreneurial expertise. All the four are required to produce goods and services. No society has enough of all the four. No country has enough resources to satisfy all people wants. People everywhere want more goods and services than there are means to produce them.

(iii) Alternative use of resources

Alternative uses means that a resource can be used for many purposes. But a resource can be used only for one purpose at a time. A piece of land can be used, at a time, either for growing crops, or for erecting a building, or for using as a garden, and so on. Time is a resource. You cannot simultaneously watch a movie and attend the school. The same resources cannot be used for more than one purpose at a time.