Fundamental Economic Problems | Essay

Discuss, With Appropriate Examples, The Three Fundamental Economic Problems That
Every Society Must Deal With
Economic problems have become a popular issue in societal debates and public discussion among
academic scholars, politicians and other stakeholders. This follows from the fact that e very Society
has people whose wants are numerous and varied. Biologically, people need only air, water, food,
clothing and shelter. However, it is common knowledge that people in a modern society desire extra
goods and services that provide a more comfortable and affluent standard of living. On a sad note,
the society is forced to economize because resources needed to produce such goods and services are
scarce. Targeting unlimited wants within the confines of limited resources is the backbone of every
society’s economic problems.
It is in this respect that this essay seeks to discuss, with appropriate examples, the three
fundamental economic problems that every society must deal with. To ensure that the discussion
flows in a coordinated manner, the essay will first start by defining key terms under discussion;
particularly, society and economics. It will then introduce and discuss in detail the three
fundamental questions of economics faced by a society. Further, it will discuss the economic
systems that societies use to deal with these fundamental problems. A conclusion regarding the
above discussion will later on be drawn from the relevant points and illustrations contained in this
discussion.
As defined by McConnel (2008), Economics is a social science concerned with how individuals,
institutions and society make optimal choices under conditions of scarcity. It is therefore concerned
with human beings trying to make ends meet with what they have, the basic Economic problem is
that human wants are unlimited while resources are limited. On the other hand, society refers to
relationships among groups; the sum of social relationships among groups of humans or animals.
However, it should be noted that the word society in the context of this essay refers only to the
human society. Therefore, throughout this essay, the word society refers to a structured community
of people bound together by similar traditions, institutions, or nationality
For better or worse, most people have virtually unlimited wants. We all desire various goods and
services that provide satisfaction. Our wants extend over a wide range of products, from necessities
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such as food, shelter and clothing to luxuries such as perfumes, sports cars and yachts. Some wants
such as those of food, shelter and clothing have biological roots. Other wants such as those of
specific kinds of food, clothing and shelter arise from the conventions of society. The society is
therefore supposed to engage in economic alternatives to provide such goods and services in order
to satisfy its people. Human wants are unlimited possibly because goods wear out and have to be
replaced, or, new and improved products become available on the market, or people are just tired
of what they own and want a change (McConnel, Ibid).
Fortunately, society possesses productive resources, these include all natural resources, all human
resources and manufactured resources that go into the production of goods and services. Examples
of a society’s economic resources are; the entire set of factory and farm buildings, all equipment,
tools and machinery used to produce manufactured and agricultural products, all transportation and
communication facilities, all types of labour as well as land and its vegetation and mineral
deposits. These resources, employed in the economy, help us produce goods and services that
satisfy many of our economic wants. But the sad reality is that our economic wants far exceed the
productive capacity of our scarce or limited resources. Economic resources, which are required for
the production of goods and services to satisfy human wants, are limited (ZICA, 2007).
Varrian (2005) correctly noted that the above are the two pillars on which the whole subject matter
of three fundamental questions of economics faced by every society rests. The fundamental
questions of economics arise from the scarcity of resources and hence the choices that have to be
made to try to make ends meet, since not all of our unlimited wants can be satisfied. Every society
finds itself in an economizing problem trying to arrive at an optimal tradeoff such as; should it
devote more of its limited resources to the criminal justice system such as police, courts and
prisons or to the education system, that is, teachers, books and schools? If it decides to devote more
resources to both, what other goods and services does it forgo? Health care? Energy development?
In what follows, this essay will now discuss the three critical questions of economics that every
society must deal with. Owing to the problem of resource scarcity, every society, regardless of its
economic position has to answer the following questions; that is, what to produce? How to produce
and for whom to produce? These three questions are collectively known as the three fundamental
problems faced by every society.
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In accordance with Pydick (2000), the first question, particularly, “what to produce?” arises from
the fact that we cannot produce everything that we desire to have due to scarcity of resources. It is
obvious that a society would want good health services, perfect transport and communication
networks, good education system, only to mention but a few. Given resource constraints, achieving
all these wants becomes a mere academic exercise. A society is therefore supposed to find what
goods and services that it will need to have and which ones to forgo. The choice of what to produce
solves the problem of resource allocation. The question of “What to produce?” is purely an
allocation question. All economic systems must determine how to allocate productive resources in
the form of land (natural resources/raw materials), labor (work for which we earn pay) and capital
(human - education & job training) (physical – buildings, equipment & tools). Deciding to produce
say more of health services than education services implies that the society in question has decided
to allocate more resources to health than education.
The fundamental question of “What to produce” introduces the concept of choices to be made
owing to the fact that resources are scarce. Such choices are necessary because factors of
production are not only scarce but they also have alternative, competing uses. Choices are made, to
satisfy some wants and to forgo other wants. As earlier mentioned in this essay, when a choice is
made, an alternative has to be given up, this sacrifice is termed as the opportunity cost.
Opportunity cost explains the fact that ‘the cost of something is what you have to give up in order
to get what you want. It is the real cost of an action, which is considered as the next best alternative
forgone (Jery, & Michael, 1995).
Deciding what to produce is one question but how to produce is yet another serious matter in
question. After deciding on what goods to produce, the society must also decide how to mix the
available scarce resources in order to produce these selected goods. “How to produce?” is an
efficiency question. All societies must determine how goods and services will be produced. For
example, if society decides to produce maize, it has to decide the mode of production. That is will
it use more people and less machinery or vice versa. A production system is said to be labour
intensive if it uses more people than machinery. If instead, it uses more machinery than people,
then it is a capital intensive production technique, (Arhlestern, 2001).
As earlier stated in the previous paragraph, the fundamental question of “how to produce?” is an
efficiency question. It is therefore a critical question because efforts to increase efficiency are
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