Basic Economics Problems of Every Society – SS1 Economics Lesson Note (Second Term)

The basic economic problems of every society arise from scarcity: resources are limited, so every economy must decide what to produce, how to produce, for whom to produce, and how to use its resources effectively. Capitalist, socialist and mixed economies all face these problems, but they solve them in different ways.

Behavioural objectives

By the end of the lesson, students should be able to:

• state the four basic economic problems of every society;
• explain who decides what to produce in capitalist, socialist and mixed economies;
• distinguish between the labour-intensive and capital-intensive methods of production;
• explain how goods and services are distributed in each type of economy;
• explain what is meant by the effective use of resources.

What are the basic economic problems of every society?

Every economy, whether capitalist, socialist, mixed, developed or developing, faces the basic problem of scarcity of resources. Scarcity gives rise to the following problems:

1. What to produce?
2. How to produce?
3. For whom to produce?
4. How to achieve effective use of resources?

What to produce?

This is the foremost basic economic problem. It is concerned with which goods and services to produce and in what commercial quantities. As a problem of resource allocation, what is produced should depend on the needs and wants of the people, which are determined by different factors in different societies.

• Capitalist system: what to produce rests in the hands of private individuals and firms, who are guided by the price system.
• Socialist system: the government decides what to produce, based on the calculation of social welfare. That is, production aims at maximising the welfare of the society, as against making a profit.
• Mixed economy: what to produce is a joint responsibility of the government and private individuals, as practised in Nigeria.

How to produce?

The problem of how to produce is concerned with which economic method of production is to be used. This includes deciding the materials to be used, the techniques of production and who will organise the production.

Methods of production

Two main methods of production exist in every economy:

1. Labour-intensive method
2. Capital-intensive method

The labour-intensive method employs more people with less capital, while the capital-intensive method employs more capital equipment with fewer people. In a capitalist economy, private individuals and private resources are mainly used. In a socialist economy, the government uses public resources.

For whom to produce?

This is the problem of the distribution of goods and services among the people. The economic system of a country determines to a large extent who enjoys the goods and services.

• Capitalist system: the price mechanism determines who gets what goods and services.
• Socialist system: the government, through a centrally planned committee, distributes goods and services according to needs and individual contributions, as determined by the government.
• Mixed economy: both the price mechanism and the government decide the distribution of goods and services.

How are resources used effectively?

Resources have to be used efficiently because they are limited relative to the demand for them. The problem is how to use them effectively to maximise output (an increase in production). When maximum output is obtained with minimum inputs, the available resources have been used effectively and efficiently.

Evaluation

1. State the four basic economic problems of every society.
2. Who decides what to produce in a capitalist economy, a socialist economy and a mixed economy?
3. Distinguish between the labour-intensive and capital-intensive methods of production.
4. How are goods and services distributed in a capitalist system and in a socialist system?

Assignment

1. Explain how the following basic economic problems are solved in a free market economy.
   1. What to produce?
   2. How to produce?
   3. For whom to produce?
2. List and explain the goals of the society.
3. What are the factors that determine what to produce, and how to produce?
4. Every economic system is faced with some fundamental economic problems. Explain this statement.
5. List and explain five types of wealth.
6. Which of the following is not a fundamental economic problem? (a) What to produce? (b) Method of production? (c) For whom to produce? (d) How to enjoy production?
7. Scarcity refers to (a) the absence of goods in the market (b) period of production (c) limited resources (d) the control of resources.
8. The consumer has to choose because wants are (a) limited while means are unlimited (b) limited and means are also limited (c) unlimited while means are limited (d) unlimited and means are also unlimited.
9. The concept of economic efficiency primarily implies (a) producing without waste (b) obtaining the lowest possible cost (c) conserving our petroleum resources (d) equity in the distribution of the nation’s wealth.
10. Economic problem arises because (a) man is insatiable (b) money is scarce (c) resources are scarce relative to wants (d) man engages in so many economic activities.