Human wants are unlimited and productive resources such as land and other natural resources, raw materials, capital equipment etc. with which goods and services are produced to satisfy those wants are found to be scarce in earth and not available to meet the entire demands of the society. The problem of scarcity of resources is felt not only by individuals;
however, also by the society as a whole and this gives rise to the problem of how to utilize the available resources for the purpose of attaining maximum satisfaction. This is normally called as the economic problem and each economic system, be it capitalist, socialist or mixed, has to deal with this central problem of scarcity of resources relative to wants for them.
The central economic problems can be further divided into four basic economic problems namely; what to produce; how to produce; for whom to produce and what provisions that are required to be made for the growth of the economy.
What to produce?
Every society has to decide which goods are to be produced and in what quantities. The society may in need of a.Food items for the consumption of people living in the society; b.Guns and weapons for the use of military forces in order to protect the nations from the enemies; c.Schools and colleges to provide education to the children; d.Hospitals towards affording medical treatment to the public;
Not only the society has to decide about what goods are to be produced and in a nutshell, the society must decide as to how much wheat, how many hospitals, how many schools, how many machines, how many meters of cloths etc. have to be produced.
How to produce?
There are various alternative techniques of producing a commodity. For example, cotton cloth can be produced with either handlooms or power looms or automatic looms. Production with handlooms involves the use of more labor
and production with automatic loom involves the use of more machines and huge capital. Under such circumstances, the society is in a position to find anyone alternative among the available two alternatives when it comes to providing cloth to the society.
For whom to produce?
Another important decision which a society has to take is for whom to produce? The society cannot satisfy all wants of all the people and therefore it has to decide who should get as to how much of the total output of goods and services.
What provisions should be made for the economic growth of the country? A society may not like to use all its scarce resources for the current consumption only. This is on account of the facts that it uses all the resources for the current consumption and no provision is made for the future production. Therefore, a society has to decide as to how much saving and investment should be made for future progress.