This document discusses the economic problem of scarcity. It explains that resources are limited and have alternative uses, creating scarcity. The basic problems an economy faces are what to produce, how to produce it, who receives goods/services, and how to provide for growth. Resources are never enough to satisfy all wants, so they must be allocated. Key terms are defined, such as needs, wants, resources, economic goods that have value and scarcity, and free goods that are available without cost like air. The difference between economic and free goods is also outlined.

1. CHAPTER 1
THE NATURE OF THE
ECONOMIC PROBLEM
PREPARED BY,
ASHINA FATHIMA

2. NEEDS AND WANTS

3. RESOURCES
The factors used in producing goods or providing services. In other
words, they are the inputs that are used to create things or help you
provide services. Economic resources can be divided into human
resources, such as labor and management, and nonhuman resources,
such as land, capital goods, financial resources, and technology.

4. ECONOMIC PROBLEM
Problem arises because the resources of all types are limited and
have alternative uses. If the resources were unlimited or if a resource
only had one single use, then the economic problem would probably
not arise. However, be it natural productive resources or man-
made capital/consumer goods or money or time, scarcity of
resources is the central problem.

5. BASIC PROBLEM OF AN ECONOMY
#1 – What to Produce?
should we produce more guns or more butter?
#2 – How to Produce?
you can produce cotton cloth using handlooms, power looms or automatic
looms. While handlooms require more labour, automatic looms need higher
power and capital investment.
#3 – For whom to Produce?
who gets what share of the total output of goods and services produced.
#4 – What provision should be made for economic growth?
Society must decide on the part of the resources that it wants to save for
future progress.

6. SCARCITY OF RESOURCES
Scarcity of resource is a feature of all societies from the richest and to
the poorest. Scarcity of resources does not mean that rare and small
quantity of resources, it simply means that it is not enough to satisfy
all wants at once. That is, resources are scarce in relation to their
demand. The economic resources land, labour, material, fuel,
machinery etc which are needed to produce goods and services are
limited in supply. However over technological progresses enable us to
produce more things with a given resources. However, the problem is
that our wants increase faster than our ability to produce goods and
services.

7. ALLOCATION OF RESOURCES
As resources are scarce and our wants are never ending, we have to
allocate resources. When we allocate resources, we ask the following
questions.
• What goods and services should we produce?
• How should the economy use its resources to operate schools or
hospitals?
• What mix of goods will it produce?
• What is the best way to produce goods and services?
• What is the best use of scarce resources?
• Who is to receive goods and services?

8. KEY TERMS
Needs – something essential to survival – food, water, warmth,
clothing and shelter.
Wants – something you would like to have, but is not essential to
survival – for example cars, mobile phones and chocolate.
Resources – something used to produce output.

9. ECONOMIC GOOD
A commodity or service that is useful to man but that must be paid
for —usually used in plural.
An economic good is a good or service that has a benefit (utility) to
society. Also, economic goods have a degree of scarcity and therefore
an opportunity cost.

10. FREE GOOD
A free good is a good with zero opportunity cost. This means it can be consumed in as much quantity as needed without
reducing its availability to others.
Examples of Free Good
Air. Oxygen is something we need and we can simply breathe it in. There is no element of rivalry (e.g. if I breathe, there is
still enough air for you to breath too.)
Intellectual ideas. If you develop a new invention and don’t patent it (e.g. yoga exercises, how to tie a knot) anybody can
reuse this idea without any opportunity cost.
Web-page. If you view a web-page, it doesn’t prevent anyone else consuming the good – it is still available at no
opportunity cost.
Sunlight. Sunlight is available to all.
 Unless your neighbour grows a leylandii hedge and casts your garden in shade.
Music. Once a song is composed, everyone is free to sing the tune.

11. DIFFERENCE BETWEEN ECONOMIC
AND FREE GOOD
ECONOMIC GOOD FREE GOOD
Demand is higher than supply and
availability
Are available and abundant in nature
Requires human efforts for production Does not require human efforts to
produce
Has a money value or price Has no money value or price
Can be regarded as wealth in economics Cannot be regarded as wealth in
economics
They are not gifts of nature e.g. table,
chair, stationery
They are gifts of nature e.g. sunlight, air
,water