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The Basic Economic Problem

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The Basic Economic Problem

The basic economic problem is the scarcity of resources to satisfy all human needs and desires

(Heilbroner & Galbraith, 1989). Human needs have the characteristic of being unlimited, that is, once

the most basic needs are met, other higher-order needs arise, then others, and so on almost to infinity.

The goal of every society is to satisfy the needs of its own citizens. But to achieve this, it is

necessary to have a series of resources that can be converted into goods and services suitable for

consumption by the population (Bade & Parkin, 2021), such as food, clothing, houses, roads, hospitals,

schools, etc. Productive resources, therefore, are everything necessary to produce goods and services

(Bade & Parkin, 2021), such as raw materials, labor, machinery, energy, construction, financial capital,

etc. The problem, as mentioned in the first paragraph, is that productive resources are limited,

compared to the unlimited nature of the needs and desires that must be satisfied.

There is, therefore, a relative scarcity in economic life, because not all needs can be met with

the available resources (Smith, Le Grand, & Propper, 2008). This is the fundamental economic problem.

If resources were infinite or human needs were limited, the economic problem would not exist, and the

needs of the entire society could be satisfied.

Scarcity is a relative term because resources are measured in comparison to the needs that are

intended to be satisfied, and, in this sense, these resources are always insufficient, limited, or scarce to

cover all needs and all desires (Heilbroner & Galbraith, 1989). However, the scale of scarcity is different

for different people or societies. For example, for a poor person or a rich person: while the first suffers it

dramatically, the second experiences it as a frustration for having to deprive himself of some desire. In

any case, and given that needs have a cultural character, scarcity exists for everyone, although

sometimes we forget it and live as if the limits did not exist.

Economic activity arises precisely to overcome the problem of the scarcity of resources. The

impossibility of obtaining everything we want forces us to choose what we are going to produce with

these limited resources, which needs are going to be satisfied and which are not (Smith, Le Grand, &

Propper, 2008).

This general problem is subdivided into three more specific ones: what goods to produce, how

to produce them, and for whom to produce them (Bade & Parkin, 2021).

Each society has its own rules for responding to these questions. That is, each society organizes

its economy in the way it considers appropriate to face this economic problem. Each society chooses its

economic system, and according to Heilbroner & Galbraith (1989) the economic system of a society is

the set of principles and rules with which a society is organized and tries to solve the 3 basic economic

problems. That is, it is the way in which the 3 questions mentioned above are answered and which

precisely shows how to confront the basic economic problem.

These 3 problems and how to deal with each one, based on Heilbroner & Galbraith (1989), Bade

& Parkin (2021), and Smith, Le Grand, & Propper (2008), can be described as follows:

1. What to produce. The first thing a society must decide is what goods it wants to produce. This

depends fundamentally on 2 basic factors: the resources that society has, and the needs that citizens

have.

2. How to produce. Now, society must decide how production is to be organized, that is, it’s

necessary to define those responsible for carrying out the productive activity, the production to be used,

and how the available productive factors are going to be combined. Society must decide whether

machines or workers will be used for production, what sources of energy they will use, whether

production methods will be as cheap as possible, even if they pollute, or whether the priority is for them
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to be ecological, even if they are more expensive. Another important decision is whether goods are

produced by the State (such as roads or parks) or by private companies.

3. For whom to produce? This question is complicated because it is almost never the person

who produces the goods who keeps them. It’s necessary to decide how the produced goods by

companies, societies, and nations will be distributed. they must answer the following questions: Are

goods distributed equally among all citizens? Are the goods distributed according to citizens’ needs? Or

are the goods only for those who can afford them? Will all citizens be helped to achieve a minimum level

of consumption? Will there be rich and poor?

This post began with a simple definition of what the basic economic problem is, but we see that

some questions arise, which can have very different answers depending on each society. Factors such as

inflation, unemployment, currency devaluation, and economic recession, among others, turn that simple

question that was initially posed into a complex system, as shown in the video of Khan Academy (2017).
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References

Bade, R., & Parkin, M. (2021). Foundations Of Economics (9th ed.). Pearson.

Heilbroner, R. L., & Galbraith, J. K. (1989). The Economic Problem (9th ed.). Prentice-Hall.

Khan Academy. (2017, August 8). Economic models | basic economics concepts | AP macroeconomics

and microeconomics. YouTube. [Link]

Smith, S., Le Grand, J., & Propper, C. (2008). The Economics Of Social Problems (4th ed.). Red Globe

Press.