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Every country has to solve the following five inter related problems:
1. What to produce?
2. How to produce?
3. How to distribute the national income?
4. How to ensure growth?
5. How to ensure proper utilization of scare resources?
These problems are now discussed in brief:
1. What to produce?
The first function of the society is to decide which goods are to be produced and in how much quantity. Since the resources at the disposal of the society are scarce, it has to make a choice between “guns or butter”, or a choice between necessities and luxuries. The decision about the allocation of resources between consumer goods and capital goods; their quantity and quantity is the utmost importance from the point of view of economic growth.
2. How to produce?
There are various alternative methods or techniques of producing goods. The society has to choose the least cost combination of producing goods. For instance, cloth can be produced with either hand looms (labor intensive technique) or power looms (capital intensive technique). The society, depending upon its resources and the state of technology available to it should use the most efficient method of production.
3. How to distribute the national income?
The distribution of national income among the members of the community is a burning issue both in the field of economics and politics. The socialists are of the view that all the people should get fair share by redistribution of national income. The other’s view is that, in a free enterprise economy, each individual should get his share from the total output of goods according to the income available to him through his genuine efforts.
4. How to ensure growth?
The economic growth can be attained by
a) Increasing the rate of investment
b) Replacement of capital goods
c) By improving the technical process of production.
A society, therefore, shall have to take timely decisions for allocation scarce resources for investment, replacement and technological progress. In that case a part of the resources are not diverted for capital accumulation and technological progress then the rate of growth will go down. The standard of living of the people will fall.
5. How to ensure proper utilization of scarce resources?
We thus conclude the economic problem arise because of scarcity of resources that people want for the satisfaction regarding goods. The scarcity of resources involves the problems of choice or allocation of resources among the competing ends. Economics, in short, is a science of efficiency in the use of scarce resources.