BASIC ECONOMICS PROBLEM

BASIC ECONOMIC PROBLEMS

Ø Scarcity: the term arises as a result of inadequacy of resources to meet up the numerous human wants. Inadequacy also means limited. When the resources are limited in relation to numerous human wants, scarcity prevails.

As a result of scarcity, every economic system must solve four fundamental problems;

1.     WHAT TO PRODUCE

2.     HOW TO PRODUCE

3.     FOR WHOM TO PRODUCE

4.     EFFICIENT ALLOCATION OF RESOURCES

What to produce; the problem arise as a result of the numerous human wants. This problem is majorly determined by the consumers. No producer will want to produce what is not sought for in the market. If there is high demand for any basket of goods, then the producers will allocate his resources towards the production of that particular goods and services sought for.

How to produce; having solved the problem to a limited extent, the next problem arises. Producers must decide how to combine their resources in order to achieve efficient and optimal allocation of resources. The firm might decide to use the labour Intensive technique (more workers in the production of goods and services) or capital Intensive technique (more use of machine equipment and advanced technology).

For whom to produce; the question of demographic profile is brought up here. What categories of the consumers is the output to be produced for. Is it for the Old, Muslim, young dancers etc.

Efficient use of resources; finally, this term refers to allocating resources in sufficient and optimal manner, that will result in greater output and availability of goods and services to meet up numerous human wants.

Ø Choice; as a result of scarcity, choice prevails. It involves choosing among several alternatives. Choice can also mean giving up something in other to get something else. For example, James goes to the market with N4,000 to purchase a pair of shoe, trouser and cap. But could not buy all as a result of limited income. The shoe cost N2,500, trouser N 1,500 and cap N1000. He has to choose among these three commodities, giving his limited resources.

He may choose to buy the shoe and trouser, shoe and cap or cap and trouser.

Ø Scale of Preference; it is a list of want, arranged in order of their relative importance. The more pressing needs comes first before other.

Below is James Scale of preference cited from the example of choice

SN	Commodity	Price
1	Shoe	N2,500
2	Trouser	N1,500
3	Cap	N1,000

From the above scale of preference, shoe is the most pressing need followed by trouser and then cap.

Ø Opportunity cost; it is the expression of cost in terms of forgone alternative. It is the best alternative forgone in the process of making a choice. Still citing from the example in scale of preference, assuming the James decides to buy only the Shoe N2,500 and the Trouser N1,500, leaving out the cap N1,000. The forgone cost N1,000 (cap) is termed opportunity cost, while N4,000 (Shoe and Trouser) refers to the money cost.

Money cost is the actual cost which is incurred in acquiring a particular commodity and it is viewed in terms of the accountant perspective while Opportunity cost also known as Real cost is viewed and used in terms of the economist perspective. See above for the definition of opportunity cost.

Article posted by: Monday Desmond