Economics Notes - The Economic Problem

Notes on basic economics concepts.

Economics Notes

The Economic Problem

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How do we sum up the basic economic problem? We all suffer from it and spend most of our lives trying to resolve it. Essentially, the economic problem stems from the fact that as humans, we have unlimited wants and needs. A need is something that can be seen as being essential to survival, such as food, water, shelter and warmth. A want is something that we would like to have but which is not essential to survival - a car, the latest version of the PlayStation, that new top you have seen in Top Shop, the mobile phone with all the latest gadgets on etc.

The problem is that the world and every individual in it have limited resources in relation to the wants and needs we have. We never have enough money to get what we 'want'. There are never enough resources to make sure the health service works properly; teachers and lecturers will always moan about how they never have enough resources to do their job properly. In recent times, we have heard much about the problems faced by the armed forces in conflict zones around the world 'not having the tools to get the job done'.

Tank on a dusty road

There have been plenty of news items in recent years about the lack of resources available to the military in dangerous conflict zones such as Iraq and Afghanistan. If we were to increase the number of soldiers, equipment and weapons available to the military, it would have consequences elsewhere. The government has limited funds from taxes, which have to be spent on a wide range of things - if we diverted more funds to the military, there would have to be cuts elsewhere in the government's spending programme - or a rise in taxes. Copyright: Dragon MasterGunner, from stock.xchng.

All these things are symptomatic of the tension between scarce resources and unlimited wants and needs. That is what the economic problem is all about.

At this stage, you might point to the fact that countries like the UK and the United States produce massive amounts of waste every year. You might look at the food that is wasted in restaurants, fast food outlets and even the school canteen every day to wonder why there is so much wasted food, with so many people in the world hungry and on the verge of starvation.

Part of the problem is the fact that resources are not distributed evenly between countries and societies. The terms 'wants' and 'needs' are also relative terms. 'I really, really want a Ferrari' might be the comment of an individual in the UK; 'I really, really want to be able to walk only two miles to get the daily ration of water for my household' might be the cry of an individual in the Sudan. To each individual, they are both important - we might be able to point out that the Ferrari is not really that necessary; a Smart car will do just as well!

Fancy red Ferrari parked on a street Silver Mercedes Smart car Young African boy dressed in rags

Wants, needs and scarce resources - all part of the economic problem. Wants and needs are relative - my burning want might be very different from the wants of someone like the boy in the image above. Copyright: Luca Biagiotti from stock.xchng, Andrew Ashwin, and Luc Sesselle from stock.xchng.

Resources is a specific term used a great deal in economics. It describes all the things available at our disposal that can be used to satisfy our needs. This therefore includes things like our income, which is simply a means of acquiring a range of goods and services. Resources therefore might be the food we buy at shops, clothing, houses, cars, entertainment, metal, minerals, oil, timber, gas, plastics and so on.

In economics, these resources are normally classified into three or four categories. These are:

  • Land - all the natural resources of the earth. That includes the fish in the sea, all the minerals found in the earth, metals, sand, stones, rocks, timber, food from the soil and so on. Economists have a name for the reward for the income from 'land' which is rent.
  • Labour - all the human mental and physical effort that goes into production. This will include people who work as street cleaners, people who are interior designers, teachers, the police, doctors, bricklayers, architects and so on. The reward for labour is referred to as wages.
  • Capital - all the equipment, machinery and buildings that is not used for its own sake but for the contribution it makes to production. This includes things like office desks and chairs, computers, lorries, cranes, specialist machinery in a factory, the humble office coffee machine and so on. The 'price' of acquiring capital is referred to as interest.

Interior of a motor factory

This factory uses a large amount of capital in the production process - there are the buildings that form the factory, all the machines that are used in production and all the equipment needed to make sure the machines and the production process operates smoothly. However, what it also needs is labour, raw materials, land and enterprise to make it all work properly. Copyright: Wena, from stock.xchng.

  • Enterprise - the skills needed to organise other resources into some form of production. Some people would put enterprise as a specialist skill within labour but enterprise does have some distinctive characteristics that merit its own category. The return for enterprise is called profit.

Garbage truck in the background, underneath a lighthouse, while two men sweep the street A dog  being operated on Man stacking bricks on a wall Man about to hit a red-hot piece of metal with a hammer

Regardless of the task, the human resource of labour comes in many different forms. Labour offers its services in exchange for a reward or price - wages. Copyright: Cristina Ortigoso, Mitchell Powell, Joseph Zlomek and Francesco Pacilli, all from stock.xchng.

If we had an unlimited supply of resources at our disposal we would be able to meet any want or need. The problem is, we do not have unlimited resources at our disposal. We therefore have to make choices. Economics, could, therefore, be described as the science of choice.

Choices are made at many different levels.

  • You might go into a shop and see two great-looking pairs of jeans but you only have enough money (resources) to buy one of them.
  • A hospital manager may have 50 patients all wanting to have an operation immediately but there might only be sufficient resources (doctors, nurses, equipment, rooms, beds etc.) at that time to treat 20 of them.
  • A business might have received a major order for its products and wants to increase production but does not have the staff or the equipment and raw materials to meet the order in full.
  • An individual in Ethiopia might want a bowl of rice to eat but has to survive on whatever they can scavenge from the parched earth.

All these examples highlight the problem of scarce resources in relation to wants and needs. When we are faced with these choices, we have to go through some quite sophisticated decision making. We might not always be aware that we are making sophisticated decisions but in reality we are. Such decision making is at the heart of the subject of economics and tells us something about how humans try to tackle the economic problem.

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