Causes of 6 Economic Problems That Arises from Problem of Scarcity

Causes of 6 Economic Problems That Arises from Problem of Scarcity
The following are the main questions which have been asked by the economists from time to time.
It is worth remembering that all these fundamental questions arise because of the basic problem of scarcity confronting an economy.
1. What goods are produced and in what quantities by the productive resources which the economy possesses?
2. How are the different goods produced? That is, what production methods are employed for the production of various goods and services?
3. How is the total output of goods and services of a society distributed among its people?
4. Are the use of productive resources economically efficient?
5. Whether all available productive resources of a society are being fully utilized, or are some of them lying unemployed and unutilized?
6. Is the economy’s productive capacity increasing, declining or remaining static over time?
The six questions listed above have been the concern of economic theory from time to time. As said above, all of them arise from the fundamental problem of scarcity. All economies whether they are capitalist, socialist or mixed, must take decision about them. Economic theory studies how these decisions are arrived at in various societies.It is worth mentioning that economic theory has been mainly evolved and developed in the framework of capitalist institutions where free market mechanism plays a dominant role in solving the above basic problems. Therefore, mainstream economic theory assumes free market system and explains how the above six problems are solved by it and with what degree of efficiency.We shall explain below above six problems and questions in detail and see how they are related to the problem of scarcity.
1. The Problem of Allocation of Resources:
The first and foremost basic problem confronting an economy is “What to produce” so as to satisfy the wants of the people. The problem of what goods are to be produced and in what quantities arises directly from the scarcity of resources.If the resources were unlimited, the problem of what goods are to be produced would not have arisen because in that case we should have been able to produce all goods we wanted and also in the desired quantities. But because resources are in fact scarce relative to human wants, an economy must choose among various goods and services. Wants for those goods which society decides not to produce will remain unsatisfied. Thus the question of selecting goods for production implies which wants should be satisfied and which ones to be left unsatisfied.If the society decides to produce a particular good in a larger quantity, it will then have to withdraw some resources from the production of other goods and devote them to the production of the good which is to be produced more. The greater the quantity of a good which is desired to be produced, the greater the amount of resources allocated to that good. The question of what goods are produced and in what quantities is thus a question about the allocation of scarce resources among the alternative uses.Thus, with the given scarce resources, if the society decides to produce one good more, the production of some other goods would have to be cut down. For instance, at times of war, when the society decides to produce more war goods like guns, jet planes and other armaments, some resources have to be withdrawn from the production of civilian goods and devoted to the production of war goods. Because of the scarcity of resources we cannot have more ‘guns’ and more ‘butter’; some ‘butter’ has to be scarified for the sake of more ‘guns’.What determines the allocation of resources and what are the results of attempts made to change the allocation has occupied the minds of economists from the very beginning of our economic science. Whatever the type of economy, be it capitalist, socialist or mixed, a decision has to be made regarding allocation of resources.In a capitalist economy, decisions about the allocation of resources or, in other words, about what goods are to be produced and in what quantities are made through the free-market price mechanism. A capitalist or free-market economy uses impersonal forces of demand and supply to decide what goods are to be produced and in what quantities and thereby determines the allocation of resources.The producers in a free-market economy, motivated as they are by profit considerations, take decisions regarding what goods are to be produced and in what quantities by taking into account the relative prices of various goods. Therefore, the relative prices of goods, which are determined by free play of forces of demand and supply in a free market economy, ultimately determine the production of goods and the allocation of resources.The branch of economic theory which explains how the relative prices of goods are determined is called Microeconomic Theory or Price Theory and has been the concern of economists from the earliest days of economics.
2. Choice of a Production Method:
There are various alternative methods of producing goods and a society has to choose among them. For example, cloth can be produced either with automatic looms or with power looms or with handlooms. Similarly, fields can be irrigated (and hence wheat can be produced) by building small irrigation works like tube wells and tanks or by building large canals and dams.Therefore, it has to decide whether cloth is to be produced by handlooms or power looms or automatic looms. Similarly, it has to decide whether the irrigation has to be done by small irrigation works or by large canals. Obviously, it is a problem of the choice of production techniques. Different methods or techniques of production would use different quantities of various resources.For instance, the production of cloth with handloom would make use of relatively more labour and less capital. On the other hand, production with automatic looms uses relatively more capital and less labour. Therefore, production with handlooms is a labour-intensive technique while production with automatic looms is a capital-intensive technique of producing cloth. Thus, a society has to choose whether it wants to produce with labour- intensive methods or capital-intensive methods of production.More generally, the problem of ‘how to produce’ means which combination of resources is to be used for the production of goods and which technology is to be made use of for their production. Scarcity of resources demands that goods should be produced with the most efficient method. If the economy uses its resources inefficiently, the output will be less and there will be unnecessary loss of goods which otherwise would have been available.The choice between different methods of production by a society depends on the available supplies and the prices of the factors of production. The criterion for the choice of a method of production should therefore be the cost of production per unit of output involved in various methods. We have noted above that economic resources are scarce relative to demand. But economic resources are unequally scarce; some are more scarce than others. Therefore, it is in society’s interest that those methods of production be employed that make the greatest use of the relatively plentiful resources and economizes as much as possible on the relatively scarce resources.Why one method of production is used rather than another and consequences of the method used are dealt with in the Theory of Production. In the theory of production we study the physical relationship between inputs and outputs. This physical relationship between inputs and outputs along with prices of factors goes to determine the cost of production. Cost of production governs the supply of goods which together with demand for them determines their prices.The theory of production thus becomes a part of microeconomic theory (i.e. theory of price) and will be explained in detail in the present work.It is worth noting here that the choice of technique of production is dealt with not only in microeconomic theory but is also an important issue in the theory of economic growth. This is because the choice of a production technique determines not only the cost of production of a commodity but also the surplus which can become a source for further investment. The greater the surplus, the higher the rate of investment and therefore the higher the rate of growth of output and employment. An eminent economist. Prof. Amartya Sen, currently of Harvard University, has analysed the choice of technique as an important issue in economics of growth of the developing countries.

3. The Problem of the Distribution of National Product:

This is the problem of sharing of the national product among the various individuals and classes in the society. The question of distribution of national product has occupied the attention of economists since the days of Adam Smith and David Ricardo who explained the distribution of national product between different social groups such as workers and capitalists in a free market society. Who should get how much from the total output of goods and services is a question concerning social justice or equity.Economists’ interest in this subject has increased very much’ in recent years. It is important to note that the distribution of national product depends upon the distribution of money income. Those people who have larger incomes would have larger capacity to buy goods or to use Prof. Amartya Sen’s phrase, would have larger entitlement for goods and hence will get greater share of output. Those who have low incomes would have less purchasing power to buy things and will therefore be able to obtain a small share of output. More equal is the distribution of income, more equal will be the distribution of national product.Now, the incomes can be earned either by doing some work or by lending the services of one’s property such as land, capital. Labour, land and capital are factors of production and all of them contribute to the production of national product and get prices or rewards for their contribution. The question as to how the prices or rewards of factors of production are determined is the subject-matter of the Theory of Distribution.After the marginalist revolution in economic theory, theory of distribution has been boiled down to the theory of factor pricing which is an important part of the price theory or what is now popularly called microeconomic theory. The old division of factors into land, labour and capital is retained in modern economic theory but their old association with ‘social classes’, such as capitalist and working classes as was made by classical economists has been given up.The theory of distribution viewed as the theory of pricing of factors of production is merely an extension of the theory of price or value. Prof. A. K. Dassgupta rightly remarks “Distribution appears an extension of the theory of value, being just a problem of pricing of factors of production. The two aspects of the economic problem are then integrated into a unified and logically self-consistent system.Value of commodities is derived in the ultimate analysis from utility, and value of factors derived from productivity imputed by the commodities which they help in producing. The old tripartite division of factors into land, labour and capital is retained but their old association with social ‘classes’ is lost. Factors are conceived as just productive agents independently of the institutional framework within which they operate.”The theory of distribution viewed as the theory of factor pricing deals with the functional distribution of income rather than the personal distribution of income, since it explains only how the prices of factors, that is, wages of labour, rent of land, interest on capital and profits of entrepreneur are determined. But the question which we raised, namely, “how the national product is distributed among the various individuals that comprise a society” is not fully answered by the theory of functional distribution.It is the personal distribution of income that determines who would get how much from the national product. Now, the income of a person depends not only on the price of a factor he owns and the amount of work he does but also on how much property or assets in the form of factors of production such as land and capital he owns. Private ownership of the means of production is a sine qua non of the capitalist system.Therefore, the personal distribution of income is greatly affected by the distribution of the ownership of property. A person who owns a large amount of property will be enjoying a higher income. In the free market capitalist economies because of the large inequalities in the ownership of the property there are glaring inequalities of income. As a result, the distribution of national product is very much unequal in capitalist economies.In recent years, the governments of the capitalist countries, like U.S.A., Great Britain have taken various steps to reduce inequalities of income and property and have accordingly tried to influence the distribution of national product. Since the distribution of the ownership of property is an institutional factor. We shall, therefore, confine ourselves to the analysis of the theory of functional distribution which is an integral part of the microeconomic theory.
4. The Problem of Economic Efficiency:
Resources being scarce, it is desirable that they should be most efficiently used. It is therefore important to know whether a particular economy works efficiently. In other words, whether the production and distribution of national product decided by an economy is efficient. Having asked what and how goods are being produced and how the total national product is distributed, it is but proper to ask further whether the production and distribution decisions of an economy are efficient ones.The production is said to be efficient if the productive resources are allocated among production of various goods in such a way that through any reallocation it is impossible to produce more of one good without reducing the output of any other good. The production would be economically inefficient if it is possible by rearranging the allocation of resources to increase the production of one good without reducing the output of any other. Likewise, the distribution of the national product among individuals of a society is efficient if it is not possible to make, through any redistribution of goods, some individuals or any one person better off without making any other person worse off.It is not enough to allocate resources efficiently for production among goods and distribute then efficiently among individuals for consumption. The achievement of these production and distribution efficiencies will not ensure maximum well-being if the economy is producing goods which do not correspond to the preferences of the people.For attaining economic efficiency, product-mix, that is, allocation of resources among production of various goods should be in accordance with the preferences of people, given their incomes. If the economy is producing wrong-mix of goods, then through reallocation of resources among them it will be possible to make some people better off without any one worse off.