I] The Crusoe economy : ( Robinson Crusoe was an isolated man living on an isolated island; or a yogi is in the Himalayas is an isolated individual)

From what we have observed so far it appears that an economic problem arises only when we live in society. Thus a person would like to know whether Robinson Crusoe the lonely isolated man on a lonely isolated island also happened to face an economic problem.

Obviously he had many wants-water, food, clothing, shelter, fishing nets, weapons for hunting etc. The means with which to satisfy these wants were scarce. Though he had no capital he had an easy access to natural resources to meet basic requirements. He had labour, time & energy which had alternative uses i.e. if he decided to go fishing he could not hunt etc.Therefore economic problem arises even in case of isolated individuals.

Even in case of isolated individuals the ends were unlimited. Man is so made by nature that at no time is he fully satisfied. Hence he has to choose which wants to satisfy & which to postpone on the basis of scale of preference. Therefore he faces an economic problem.

However in case of the society as a whole the economic problems are more complex in nature.

II]. Economic problem at the individual level:

An individual has two important roles to play simultaneously–a consumer & a producer. In both these roles he faces economic  problems.

1) Consumer- a consumer’s economic problem is setting up of priorities. The three main activities he is concerned with are,

i. Earning.

ii. spending.

iii. saving. &

iv. how to divide time between work & leisure? i.e. how to earn in order to spend on goods & services for the satisfaction of ends & how to save for the future.

As a consumer an individual’s economic activity is directed to achieve his aim of getting maximum satisfaction in his budgetary constraints. He therefore allocates his limited income in purchasing a combination of goods & services, bearing in mind their prices, so as to achieve what is known as the consumers equilibrium i.e. he has to achieve maximum satisfaction with the limited resources at his disposal. Therefore he tries to choose the goods & services with greater utility than goods & services with less utility. —Law of substitution & equimarginal utility.

2. Producer – a producer’s economic problem is to maximise profits. This involves three activities.


ii) Resources.

iii) Costs.

He has to decide what commodity to produce, where, when, how, how much, at what cost to produce; where to market it when to market it; also he has to set a price so as to maximise profits. Once his target is set he has to decide how to allocate his resources i.e. factors of production land, labour, capital and enterprise ie  allocation of his investment outlay so as to minimise costs & maximise outlay & procure maximum profits.

He therefore acts on the principal of substitution –i.e. use of more productive & less costly factors of production & equimarginal utility.

III]. Economic problem at the family level:

A family is considered to be a household unit in economics with the usual aim to maximise satisfaction with the given limited income.

Wants of the family are food, clothing, shelter, necessaries (of life, efficiency & convention.), comforts & luxuries. Means with which to satisfy these wants is the total income of the family from all sources in cash or kind & this is limited.

The main problem is what & how much to buy. The family has to select the most urgent wants first & distribute its income over all these wants in such a way that the total satisfaction from all these wants is maximum (equimarginal utility.)

The urgencies or the scale of preference of each family is different eg. one family may spend more on food this month & on clothing in the next; another family may spend more on housing or education in the next etc.

How well or how badly the head of the family manages the family’s finances to satisfy the wants determines whether maximum satisfaction can be achieved or not.

The golden rule for the family therefore is the `family budget’ which was put forth by Dr. Ernest Engel a German economists, in 1857.

IV. Economic problem at the national level:

Economic problem at the national level acquires still bigger dimensions. The country has to first decide upon the nature of economic system that it should adopt — should the government be all important or should there be no government interference; capitalism or socialism; planned or unplanned economy. Having chosen the institutional framework, natural, human & man-made resources have to be allocated.

Just as an individual or a family face economic problem (scarce resources-income & unlimited ends.),the community as a whole & the government face similar economic problems in a larger context i.e. the problem of allocating scarce productive resources to achieve unlimited ends of the nation. Therefore it adopts a scale of preference so as to economise the use of resources.

Eg.1.-ends to maximise the general welfare—full employment, eradicate poverty, stabilise prices, increase production, achieve a more equitable distribution of income & wealth, capital formation, increase national income, taxation, rationing, imports foreign aid, subsidies monopoly control, family planning, economic planning etc

Eg.2.-If municipality has land should it build a school, a market,a stadium? is a national/social problem.

Eg.3.- While preparing the annual budget should the government spend more on defense or not?

Eg.4.-All decisions about investments in the public sector are included in the national economic problem.

At the national level government also faces the problem of raising revenue to finance its ever growing expenditure. No government can increase its revenue beyond a certain level even though it has the power to impose tax.

The government has to decide on the nature & structure of taxation, the possibility of augmentation of resources by resorting to public debt & deficit financing. It has to determine the overall investment outlay as well as the sectoral  outlay make efficient use of public expenditure, so as to achieve some macro-eco objectives. It spends more on urgent wants like defense & security, it would prefer to spend more for the poor than the rich, it would prefer to produce more necessary goods than luxuries.

The society as a whole therefore has to decide

1. What to produce:-

An economy has a large number of wants & therefore a large number of goods & services have to be produced to satisfy them. At the same time the economy always faces a shortage of resources & therefore all the goods & services decided by the community cannot be produced. A community will therefore select some ends to be satisfied on the basis of their urgency or scale of preference. Thus a country will take a decision regarding what to produce. These decisions are taken on the basis of the market forces in a market-oriented economy or by central planning authority in a planned economy. Eg.

i) Production of consumer goods–food, clothing, shelter etc.

ii) Production of capital goods.

iii) Production of defense goods–arms, ammunition, weapons etc.

iv) Production of developmental goods–roads, dams machinery etc.

When deciding to produce a certain combination of goods the resources available for production of other goods decrease & their production has to be sacrificed & this sacrifice has to be taken into account. Therefore resources have to be economically used. Over a period of time both resources as well as wants change so that the allocation decisions have to change along with them.(Choice is made in all the sectors of the economy. If more of consumer goods are produced less resources will be available for production of capital goods; during war time more of defense goods will be produced.)

2. How to produce:-

i.e. how to organise production & which technology to use in production in different sectors–i.e. small-scale or large-scale production; modern or traditional technique; whether to use more labour or more capital; centralised or decentralised production etc.

Selection of technique will depend on the type of resources available & their suitability for a particular production. The basic objective is to derive maximum advantage from their use & to avoid any wastage. More efficient techniques of production have to be economically used. The goods produced should be maximum & they should satisfy maximum wants of the community.

3.How much to produce:-

i.e. production should be in proportion to the wants of the community, so that resources as well as final goods are not wasted & maximum satisfaction is achieved.

4. For whom to produce:-

Whether production should be undertaken for the rich or the poor or for defense etc.

Money-using economy depends on the incomes received by the people because the quality and quantity of goods and services consumed depends on the family’s income. A rich family may consume better quality and quantity of goods and services and more of luxuries; poor family may consume sub-standard quality and less quantity of goods and services eg basic goods, requirements etc.

If low wage-goods, & if PCI is high luxuries would be produced. Defense goods are produced by all countries.

A country has to also decide whether to produce for the present or for the future i.e. consumer goods or capital goods.

For this a proper fiscal, monetary, agricultural & industrial etc policies are essential.

5. Who should produce:-

i.e. what type of ownership should be accepted, what type of management & control. Private, Government or Joint ownership.

Each type has its own merits & demerits & therefore one or a combination that will give maximum satisfaction will be selected.

6. How to distribute produced goods:-

Once the goods are produced the next problem is how to distribute them among the citizens of the country. There are many people among whom the limited goods & services have to be distributed. This is a very important problem which needs a proper solution. Such decisions may be left entirely to market forces i.e. to demand & supply; or may be carried out by the central planning authority in accordance with the pre-determined objectives like social justice & maximum social welfare.

Usually each section of the society that undertakes production expects that they would get a share generally proportionate to the production contributed by each section. This however need not always be the case. They may receive more or less than their contribution. In this case the government may regulate the distribution & in some cases the government may entirely control the distribution.

7.What incentives to give:-To achieve various objectives like to increase national income, standard of living, employment, to decrease poverty, inequality, to achieve a balanced composition of goods, stabilise prices etc the government raises revenue through taxation, borrowing, foreign aid etc;& provides loans, low interest rates, subsidies, other marketing facilities etc so that a person is induced to invest & produce.

8. How to achieve maximum efficiency:-

i.e. to produce current output efficiently & make quick adjustments i.e. If the composition of goods have to be changed according to changes in tastes & preferences of the people, growth of new techniques, methods & discovery of new resources.

In emergencies like war there should be quick reallocation of resources to produce defense goods; or in case of famine use more resources to increase the production of food-grains.

9. How to save:-

From the continuously economic activity something must be saved for future, which later can be used for further production. eg .a farmer saves corn to make seeds; an industrialist saves a part of profit to invest in future; a country produces capital goods to enable increased production in future. Therefore savings are a must because in its absence economic activity would stagnate.

10.How to promote eco growth:-

Over a period of time a country’s wants increase, people’s desires for a better standard of living, increase in population makes it necessary to increase production this is indicated by the rate of growth of the economy. . This rate of growth depends on the available capital & capital formation depends on savings. Therefore savings properly utilised are necessary for the eco growth of the country.

V. Economic problem at the global/international level:-

It may appear that the resources of the whole world are unlimited but in reality, the world as a whole too faces an eco problem i.e. resources of the whole world are limited whereas the requirements of the people of the world are multiple. Eg. the world faces problems like world food production, problem of maintaining stable rates of exchange between currencies of different countries, threat of war, business cycles, balance of payments, problem of inequality between developed & developing countries, oil crises etc

Several international organisations like International Monetary Fund-(I.M.F.);World Bank (I.B.R.D.);etc have been set up to promote growth & maintain stability in the world.

VI. Economic problem in the long-run:-

Nowhere in our discussion about the eco problem have we assumed the resources to be constant in supply (we say they are scarce & have alternative uses) Thus in the long-run resources can be increased eg. because of savings, new technology, inventions, etc. This is known as resource augmentation. Augmentation of resources takes place because every society wants rapid eco growth & development & this is indicated by a higher NI & employment. Therefore each society tries to increase both so as to achieve eco development.

However it is necessary to keep a check on stability & equality because a rapid eco development leads to rapid eco changes causing instability & a rapid increase in prices & inequality.

An eco problem in the long-run, therefore is -

i) to increase the efficiency & economical use of available resources.

ii) to undertake augmentation of resources without causing inequality & instability.


The eco problem is universal in nature because it has been, is, & always will be faced by all people, in all times at all places.

All individuals rich or poor, alone or in a group, a family or the nation face eco problems.

All countries rich or poor, democratic or communist, planned or unplanned all face economic problems.

Tagged with: , ,
Posted in General Economics