Fundamentals of the Economic Problem
Renowned American economist “Paul Samuelson” provided a clear and succinct explanation of the economic problem. He argued that for societies to address this problem, they must seek to answer three essential questions: What should be done? What should we produce? How and for whom should we produce? These pivotal inquiries are referred to as the pillars of the economic problem, which will be elaborated upon below:
What Should We Produce?
This pillar of the economic problem pertains to making decisions regarding the selection of various goods and the quantities that should be produced. This includes considerations of labor, land, machinery, capital, equipment, tools, and the limited natural resources available. Consequently, it is impractical to fulfill all the desires of society, making it crucial to identify which goods and services are to be produced and in what quantities.
For instance, if we have a piece of land, we must consider what crop should be cultivated on it. This decision can be made by assessing the natural resources of the land and determining the type of crop suitable for cultivation. Once we have decided on the crops to grow, we then need to contemplate the quantity of each crop we wish to produce.
The economy must make decisions on whether to allocate its scarce resources for producing consumer goods or capital goods. It also faces the challenge of determining how much luxury goods should be produced compared to capital goods, as well as the quantity of civilian and defense goods to be manufactured.
How Should We Produce?
This aspect of the economic problem focuses on the selection of technologies and methods that should be adopted in the production of goods and services. Typically, there are two primary types of technologies utilized:
- Labor-intensive techniques.
- Capital-intensive techniques.
For Whom Shall We Produce?
One of the central challenges in economics is identifying which goods will be produced and determining the target demographics within society. For example, there may be a general demand for essential goods and services from all segments of the community, while only specific sectors may express a desire for luxury goods.
Thus, the choices regarding goods and services are influenced by prevailing tastes and preferences within the economy. As a result, considerations related to the social and economic conditions of a particular country or market are closely linked to this pillar of the economic problem.
In conclusion, it is important to recognize that apart from resource allocation, the central issue of economics encompasses two significant aspects: the optimal use of resources and the development of resources. Therefore, to elucidate the core economic problems, we need to delve into their essence, which revolves around the choices regarding the limited resources available to maximize social and economic utility.