Every day we have to face different economic problems. Such as: poverty, inflation, unemployment, etc. We consider the scarcity of common resources as economic problems. Every society has to deal with this problem. But in addition to these problems there are three fundamental or central problems of the economy.
The problems are as follows:
(1) What to produce?
(2) How to produce?
(3) For whom will it be produced?
The issues are discussed in detail below:
(1) What to produce?
For the scarcity of resources, the producer has to decide how much of the product will be produced. That is, the producer has to face the problem of scarcity and selection at the same time. He has to decide the production and quantity of different products considering the relative importance of different shortages. This can be analyzed with the help of Production Possibility Curve.
(2) How to produce?
The second fundamental problem of every economic society is how to produce. The same quantity of goods can be produced with the help of different production techniques. The proportion that requires the use of different resources or combinations of products to produce a certain amount of goods is called 'production strategy'. For example, one 100 KG of paddy can be produced with more land using less capital or with less land and more labor - this is called production strategy. It is to be noted here that since there is a possibility of substitution in different materials during production, it is possible to use an alternative technique to produce the same quantity of goods. In this case, the society has to decide which of the alternative materials will be used. This can be analyzed with the help of the product line. Here the society has to decide which production technique will be used to produce a certain amount of goods and which combination of land and labor will be used to produce the product. This is the second fundamental problem of any economic society.
(3) For whom to produce?
Now the question is, who will enjoy the product? Who will it be produced for? This is the third fundamental problem of economic society. The main problem is that the products will be distributed among different classes of people. Merely producing goods does not meet the shortage of people. Rather, it largely depends on whether the goods produced are properly distributed. The welfare of the people also depends on the distribution of the goods produced. For example, if the distribution of goods goes in favor of a handful of people in the society, then the social welfare will not increase. Therefore, the distribution of goods among different classes of people should be done in such a way that the social welfare is maximized.