"All modern economies have certain economic problems to deal
with". Examine and illustrate the statement.
Answer. Most economic problems arise due to limited resources and unlimited wants.
The problem of economy is how to use the relatively limited resources with alternative
uses in face of unlimited wants. Society has to decide which commodities to make. For
example, do we make missiles or hospitals? We have to decide how to make those
commodities. Do we employ robot arms or workers? Who is going to use the goods that
are eventually made? Do we build a sports hall in Wigan or Woking? Seven general
problems that are faced by all economies, whether they are capitalist, socialist, or
communist, and mixed are listed below:
What commodities are being produced and in what quantities? This question
arises directly out of the scarcity of resources. It concerns the allocation of scarce
resources among alternative uses.
By what methods are these commodities produced? This question arises
because there is almost more than one technically possible way in which goods
and services can be produced. Agriculture goods, example, can be produced by
farming a small quantity of land very intensively, using large quantities of fertilizer,
labour and machinery, or farming a large quantity of land extensively, using only
small quantities of fertilizer, labour and machinery. Both methods can be used to
produce the same quantity of some good; one method is frugal with land and uses
larger quantities of other resources, whereas the other method uses large
quantities of land but is frugal in its use of the other resources. The same is true
with manufactured goods.
How is society’s output of goods and services divided among its members?
Why can some individuals and groups consume a large share of the national
output while other individuals and groups can consume only a small share? The
superficial answer is because the former earn large incomes and the latter earn
small incomes? Economists wish to know why any particular division occurs in a
free- market society and what forces, including government interventions, can
cause it to change.
Such questions have been of great concern to economists since the beginning of
the subject. These questions are the subject of Theory of Distribution.
How efficient is the society’s production and distribution? This question quite
naturally arises out of the 1, 2, and 3. Having asked what quantities of goods are
produce, how they are produced and to whom they are distributed, it is natural to
go on to ask whether the production and distribution decisions are efficient.
The concept of efficiency is quite distinct from the concept of justice. The latter is a
normative concept, and a just distribution of the national product would be one
that our value judgements told us was a good or a desirable distribution. Efficiency
and inefficiency are positive concepts. Production is said to be inefficient is it
would be possible to produce more of at least one commodity without
simultaneously producing less of any other – by merely reallocating resources.
The commodities that are produced are said to be inefficiently distributed if it
would be possible to redistribute them among the individuals in the society and
make at least one person better off without simultaneously making anyone worse
off. Questions about the efficiency of production and allocation belong to the
branch of economic theory called welfare economics.
Are the country’s resources being fully utilized, or some of them lying idle?
We have already noted that the existing resources of any country are not sufficient
to satisfy even the most pressing needs of all the individual consumer. Surely if
resources are so scarce that there are not enough of them to produce all of those
commodities which are urgently required, there can be no question of leaving idle
any of the resources that are available. Yet one of the most disturbing
characteristics of free - market economies is that such waste sometimes occurs.
When this happens the resources are said to be involuntarily unemployed (or,
more simply, unemployed). Unemployed workers would like to have jobs, the
factories in which they could work are available. The managers and owners would
like to be able to operate their factories, raw materials are available in abundance,
and the goods that could be produced by these resources are urgently required by
individuals in the community. Yet, for some reason; nothing happens: the workers
stay unemployed, the factories lie idle and the raw materials remain unused. The
cost of such periods of unemployment is felt both in terms of the goods and
services that could have been produced by the idle resources, and in terms of the
effects on people who are unable to find work for prolonged periods of time.
Why do market society's experiences such periods of involuntary unemployment
which are unwanted by virtually everyone in the society, and can such
unemployment be prevented from occurring in the future? These questions have
long concerned economists, and have been studied under the heading Trade
Is the purchasing power of money and savings constant, or is it being
eroded because of inflation? The world's economies have often experienced
periods of prolonged and rapid changes in price levels. Over the long swing of
history, price levels have sometimes risen and sometimes fallen. In recent
decades, however, the course of prices has almost always been upward. The
1970s, 1980s and 1990s saw a period of accelerating inflation in Europe, the
United States and in most of the world, more particularly in the less developed
Inflation reduces the purchasing power of money and savings. It is closely related
to the amount of money in the economy. ,Money is the invention of human beings,
not of nature, and the amount in existence can be controlled by them. Economists
ask many questions about the causes and consequences of changes in the
quantity of money and the effects of such changes on the price level. They also
ask about other causes of inflation.
Is the economy's capacity to produce goods and services growing from year
to year or is it remaining static? Why the capacity to produce grows rapidly in
some economies, slowly in others, and not at all in yet others is a critical problem
which has exercised the minds of some of the best economists since the time of
Adam Smith. Although a certain amount is now known in this field, a great deal
remains to be discovered. Problems of this type are topics in the THEORTY OF