Every economy whether simple or complex, capitalist or controlled, developed or underdeveloped will have to solve fundamental economic problems like:
1. Scarcity and choice,
2. Allocation of resources and
3. Concept of production possibility curve
1. Scarcity and Choice: - Wants of human beings are unlimited but most of the means satisfying these wants are scare. It is impossible for an economy to produce every thing for each individual because no economy possesses unlimited resources. It becomes necessary for every economy, therefore, to make a choice regarding the efficient use of the available resources of the economy like land, labour, capital, etc. For example, has to decide how much of the resources are to be used for the development of industries and how much for the development of agriculture. The problem concerning allocation of resources to different uses is called economic problem or the problem of choice. So, in this way, economic problem arises out of two basic facts:
(a) human wants for goods and services are unlimited and
(b) resources to produce those goods and services are limited or scare.
2. Allocation of Resources:- Every economy system has some problems. These are called the central problems of an economy. So, we are concerned with the following sets of problem:a). The problem of Allocation of Resources:-It is the basic problem related to utilization of resources for the production of different goods and services. It has three aspects:i. What to produce and how much to produce?ii. How to produce?iii. For whom to produce?b). How to achieve fuller utilization or full employment of resources?:-The second problem of an economy is of fuller utilization of resources or to provide full employment. Since resources are scarce, they should be properly used. There shouldn’t be the wastage or unemployment of these resources. Economic development will suffer, if certain resources remain unutilized. The problem with economy is how to use its available resources i.e. land, lobour, capital, and other resources, so that maximum output with minimum effort and wastage be made possible.c). How to Achieve Growth of Resources?:-Another central problem of an economy is to increase the level of production. It is also known as the problem of growth of resources. Each economy is faced with of how to increase its production capacity so that total production is increased. An economy can achieve the objective of resources through technological advancement.
3. Concept of Production Possibility Curve:-Human wants are unlimited but resources to meet these wants are limited or scarce. These resources can also be put to alternative uses. This creates problem of choice or economizing. Production Possibility Curve (PPC) is the locus of various combination of two goods or services that an economy can produce with full use of its given resources and state of technology.In words of Samuelson, “Production Possibility Curve is that curve which represents the maximum amount of a pair of goods or services that can both be produced with an economy’s given resources and technique, assuming that all resources are fully employed.” The concept of Production Possibility curve is based on the following assumption:
i. Available resources are fully and efficiently utilized in the economy.
ii. No change in the technique of production.
iii. Perfect mobility of factors of production from one use to the other.