The fundamental economic problem facing all societies is that of scarcity. Scarcity is the condition
that results from society not having enough resources to produce all things
people would like to have.
Factors of production refer to the inputs that are used in the production of goods or services in the attempt
to make an economic profit. The factors of production include land, labor,
capital and entrepreneurship.
Before the twentieth century, only three factors making up the “classical triad” were recognized: land, labor, and capital. Entrepreneurship is a fairly recent addition.
People cannot satisfy all their wants and needs because productive resources are scarce. Because resources are limited, everything we do has a cost. In economics this is referred to as opportunity
cost. There is a famous saying that 'there is no such thing as a free lunch'. Even if we are not asked to pay for consuming a good or a service, scarce resources are used up in the production of it and there must be some opportunity cost involved – the next best alternative that might have been produced using those
resources.
Opportunity cost is the foregone value associated with the current rather than next-best use of an asset. In other words, cost is determined by the highest-valued opportunity that must be foregone to allow current use.
America’s first Nobel Prize winner for economics, the late Paul Samuelson, is often credited with providing the first clear and simple explanation of the economic problem - namely, that in order to solve the problem of scarcity all societies, no matter how big or small, developed or not, must endeavour to answer three basic questions.
What to produce?
Societies have to decide the best combination of goods and services to meet their needs.
For example, how many resources should be allocated to consumer goods, and many resources to capital goods, or how many resources should go to schools, and how many to defence, and so on.
How to produce?
Societies also have to decide the best combination of factors to create the desired output of goods and services. For example, precisely how much land, labour, and capital should be used produce consumer
goods such as computers and motor cars.
For whom to produce?
Finally, all societies need to decide who will get the output from the country’s economic activity, and how much they will get.
For example, who will get the computers and cars that have been produced? This
is often called the problem of distribution.
What to produce?
Societies have to decide the best combination of goods and services to meet their needs.
For example, how many resources should be allocated to consumer goods, and many resources to capital goods, or how many resources should go to schools, and how many to defence, and so on.
How to produce?
Societies also have to decide the best combination of factors to create the desired output of goods and services. For example, precisely how much land, labour, and capital should be used produce consumer
goods such as computers and motor cars.
For whom to produce?
Finally, all societies need to decide who will get the output from the country’s economic activity, and how much they will get.
For example, who will get the computers and cars that have been produced? This
is often called the problem of distribution.