The Central Economic Problem

Idea

The central economic problem — the foundation of economics as a social science — is that scarcity forces choice. Human wants are unlimited, but the resources available to satisfy them are limited, so no economy can produce everything its people want. Every society must therefore decide how to allocate its scarce resources.

Mechanism

• Unlimited wants. Wants are satisfied by consuming goods (tangible items — clothes, food, housing) and services (intangible activities — healthcare, education). Wants are without end: as old wants are met, new ones replace them, so the demand placed on resources never settles.

• Limited resources. Producing goods and services requires factors of production, and these are finite. Wants therefore permanently exceed the means to satisfy them.

• Choice and allocation. Because not all wants can be met, economic agents must decide what to produce, how to produce it, and for whom. Every such decision commits scarce resources to one use and so incurs an opportunity cost.

Context

The problem is universal — it confronts a subsistence farmer and an advanced economy alike. Singapore faces it acutely: with very little land and almost no natural resources, decisions over how to use land — housing versus industry versus reservoirs — are direct expressions of scarcity and choice.