Three Basic Economic Problems

All modern economies have certain fundamental or basic economic problems to deal with. In every single economy, including the so-called “affluent society”, resources are limited. As a result, decisions regarding the resource use have to be made together by individuals, by business corporations, and by society.

It is the social choice and community preferences which give substance to the question of macro-economic decisions.

Three Basic Economic Problems of Society

Following figure shows the 3 fundamental economic problems faced by all societies worldwide.

1. What to produce ?

Each and every economy must determine what products and services, and what volume of each, to produce. In some way, these kinds of decisions should be coordinated in every society. In a few, the govt decides. In others, consumers and producers decisions act together to find out what the society’s scarce resources will be utilized for. In a market economy, this ‘what to produce?’ choice is made mainly by buyers, acting in their own interests to fulfill their needs. Their demands are fulfilled by organizations looking for profits.

For instance, if cellphones are in demand it will pay businesses to produce and sell these. If no one desires to buy radio sets, it is not worth producing them.

In case a manufacturer produces an item which buyers don’t buy in much quantity, there will likely be inadequate income. The manufacturer will have to enhance the quality and modify the product to match buyer tastes. If the item is still not preferred, the producer will most likely halt the production. In this manner, buyers get the goods they need.
Customers rule the ‘what?’ decision. They ‘vote’ for certain products and services by spending money on those they like. Each and every manufacturer has to offer what buyers want so that they can compete effectively against other manufacturers. Government authorities also perform some part in making ‘what?’ decisions. For example, a law demanding all ladies to wear a helmet generates demand for helmets, and profit-seeking businesses will produce them.

2. How to produce ?

This basic economic problem is with regards to the mix of resources to use to create each good and service. These types of decisions are generally made by companies which attempt to create their products at lowest cost. By way of example, banking institutions have substituted the majority of their counter service individuals with automatic teller machines, phone banking and Net banking. These electronic ways of moving money, utilizing capital as opposed to labour resources, have decreased the banks’ production costs.

In the Nineteen fifties dams were being constructed in China by countless people making use of containers and shovels. On the other hand dams were being constructed in the united states by using huge earth moving devices.

The initial approach to production, using a resource combination which includes a small capital and much labour, is labour-intensive while the second, utilizing a little labour and a lot of capital, is capital-intensive. Each one of these ‘how’ decisions was made based on lowest cost and accessible modern technology.

3. For whom to produce ?

This basic economic question is focused on who receives what share of the products and services which the economy produces. The portion of production which each person and family can consume is determined by their income. Income is distributed in line with the value of resources we have to sell.

As an example, a top cricket player will earn far more income than a professor. A top cricket player has a resource to sell for which many people will pay a high price. Professors are not so rare, and few people pay for their services.

The for whom decision can even be dependent upon skills shortages, in which case organizations will provide higher incomes to attract workers with rare skills. In the same way, high wages may be required to attract employees to rural locations.



The economic problem is at times referred to as the basic, central or fundamental economic problem. It is one of the crucial economic theories in the functioning of any economy in this world. Due to scarcity, choices have to be made by consumers, businesses and governments.
Scarcity can be caused by the possible lack of availability in resources, from individuals insatiable desires, or from a combination of the two. Due to the fact that resources are scarce and many of our desires are substantial, a choice needs to be made about how to use scarce resources in the most effective way.

This rule is applicable to companies, society as a whole, and to individuals. This article has discussed the 3 fundamental economic questions or three basic economic problems common to all societies. If anything is missing please post in the comments section.