Basic economic problems refer to the problems people encounter in the society while attempting to satisfy their numerous wants with the limited resources available to them. These basic economic problems of society include what to produce, how to produce, for whom to produce and efficiency of the resources used or efficient use of resources.
WHAT TO PRODUCE
The question of what to produce is one of the basic economic problems that confront any society. This problem arises mainly as a result of the fact that human wants are unlimited relative to the available resources. It is practically impossible to produce all human wants or needs hence the need for resource allocation in order to meet the pressing needs of the people.
Factors which determine what to produce
Factors to be considered in determining what to produce in a society are the following:
- Consumers’ needs: The producers will have to take into consideration the needs of the consumers. They have to decide what needs to produce, the quantity and quality of goods and services required by the consumers.
- Market demand: The demand for a particular set of goods and services by consumers may encourage producers to produce more of these goods and services. No producer will ever produce what is not demanded in the market.
- Consumer income: In deciding what to produce, the producers normally take into consideration the earnings of consumers in the society. Producers normally ask themselves this question: Are the consumers earning enough income to be able to purchase the goods and services at a given price when produced. If yes, they go ahead and produce but if no, they may not produce.
- Cost of production: A producer will go ahead and produce goods and services when cost of production is low to enable him make some profit. But when cost of production is high in such a way that he cannot make profit, he will not produce. Government may decide to take up such production just to provide the goods and services to satisfy people’s want.
- Availability of resources: When resources for production are available and affordable, the producer will be encouraged to produce goods and services. But when the resources are not available, there will be no production. Since economic resources are scarce or limited, it follows that the producer may not always have enough of them to produce commodities in abundance to meet the needs of the consumers.
- Type of economy: The type of economic system in a given society determines the type and quantity of goods and services to be produced. For example, in a capitalist economy, the price system determines the type and quantity of goods and services that are to be produced as profit is the major determinant of what to produce whereas in a socialist economy, the state controls and directs the allocation of resources hence it decides what to produce with the sole aim of satisfying the wants of the whole citizens of the society or state.
HOW TO PRODUCE
As soon as what to produce is established, another basic economic problem that will arise is how to produce the goods and services.
Factors which determine how to produce
The following factors are to be considered when determining how to produce goods and services.
- Technique of production: This refers to the level of involvement of human labour and machines. There are two techniques of production. These are: (a) Labour intensive and (b) Capital intensive techniques. Labour intensive technique employs more labour and less capital equipment and machines while the capital intensive technique employs less labour and more capital equipment and machines.
- Technological advancement: The method of production adopted by an individual, firm or state depends on the level of technological development of the state. Developing countries usually adopt labour intensive mode of production while developed countries adopt capital intensive mode of production.
- Production function: This involves any analysis which shows the possible quantity of goods by using each of the given alternative combination of resources that produces the largest quantity of output at the lowest unit of cost of production. A favourable production function will ensure large production of goods to meet the demands of the customers.
- Relative cost of factors of production: The cheaper the relative cost of factors of production, e.g. labour, capital and land, the more the production of goods and services to satisfy human wants but when cost of factors of production is high, very little production will be attained.
FOR WHOM TO PRODUCE
All goods and services produced must get to the final consumers. Production is not complete until the goods and services get to the final consumers.
Factors which determine who to produce for
The following factors must be considered when determining who to produce for ..
- Satisfaction of wants: All the goods and services produced either by individuals, firms or government must satisfy the needs or wants of the society.
- Level of income: The higher the level of income of the consumers, the more they are able to buy goods and services produced. But if the level of income is low, the purchasing power will equally be low and this will lower the rate of production of these goods and services.
- Type of economic system: In the capitalist and mixed economies, who gets what depends on the prices of the various products and the amount available to each individual, but in a socialist economy, the state normally introduces a quota system in the distribution of goods and services among the people.
EFFICIENCY OF RESOURCE USE
Efficiency of resource use in production refers to the optimum use or combination of factors of production to achieve higher and better output at a reasonable cost. Since the resources available in the society are limited relative to demand for them, it becomes a wise decision to ensure that these limited resources are efficiently used to produce the desired goods and services.
Factors which determine efficient use of resources
Factors to be considered in determining the efficient use of resources include:
- Quality of labour: Skilled labour, unlike the unskilled labour used in production, could contribute to efficient and effective use and allocation of resources in production, reduction of wastage, savings in time and consequently an increase in the quantity and quality of output.
- Techniques of production: The use of capital intensive mode of production, which involves the use of machines and equipment, may produce more goods, save time, reduce wastage and consequently be more efficient than the use of labour intensive method, which may waste time, produce less and increase wastage.