The Economic Problem

The basic economic problem facing all societies is that of scarcity The basic economic problem facing all societies is that of scarcity. Human needs (wants) are unlimited but economic resources are limited. So, individuals and societies must therefore make choices about how to allocate scarce economic resources to satisfy the unlimited human needs.

This problem involves three fundamental choices: What to produce? How to produce? For whom to produce?

To answer these three questions, economists often use diagrams to explain the concept of scarcity such as: The Production Possibility Frontier (PPF).

Production Possibilities Table A production possibilities table lists the different combinations of two products that can be produced with a specific set of resources, assuming full employment.

A: the extreme point producing only Pizzas and zero Robots. E: the extreme point producing only Robots and zero Pizzas. In between points (B, C, D): combination between producing both Pizzas and Robots. Moving from A to B to C to D to E means converting the economic resources from producing Robots to Pizzas (less Robots instead more Pizzas).

Each point on the production possibilities curve represents the maximum output of the two products that society can produce. The curve shows the limit of attainable outputs. Points on the curve are attainable as long as the economy uses all its available resources