The economic problem can be described as attempting to satisfy the unlimited and ever changing wants of the consumer with limited resources. As these wants can never be satisfied, all individuals, businesses and governments are faced with the choice of what to obtain with those resources. As each consumer group’s wants and resources varies greatly, each deals with trying to solve the economic problem in a different way.
The choices made by each individual are unique, depending on income, age, gender, living situations, education, voting, retirement and personal expectations. In order to deal with the economic problem, individuals must show preference for one good or service over another and be prepared to sacrifice many of the things that they desire. The individual must also plan how much of his/her income they will spend and how much they will save. This ratio can be difficult to establish and can change at any time. Each individual is faced with the economic problem many times daily, and will continue to be faced with the challenge of choices.
Businesses too face the economic problem, but on a more complex level than the individual. A company must first decide what area of business that they will specialise in order to generate the most success. As businesses have limited resources they must focus these on a product or service that will hopefully generate a profit in order to continue operating. Once that is decided, the company must first price the product and then try to allocate its resources (land, labour, capital or enterprise) in order to maximise efficiency. In order to minimise costs, a company may have to choose between quality and quantity which can lead to difficult decisions purchasing equipment, employing/ paying reliable employees and obtaining supplies. Unlike the individual, a business must also contend with the problem of industrial relations, such as wages, contracts, managing employees and union agreements, creating more choices and intensifying the economic problem.
The Government not only faces the economic problem itself, but can influence the choices of both individuals and businesses by placing taxes on some items (making them more expensive and generating revenue) or making some goods and services cheaper. Governments also have the power to restrict and regulate economic behaviour by prohibiting some behaviours and enforcing fines. The choices a government makes in answer to the economic problem have large implications on the community they serve.
A national Government for instance, may choose to concentrate on defence plans and forgo other areas such as education. Although this satisfies the immediate wants, in the future it may lead to low economic activity, affecting the entire nation. Governments often find this a problem when trying to be more popular with voters (the individual consumer). The Government has the largest influence on the economy; therefore careful consideration must take place when making choices in response to the economic problem.
Although individuals, businesses and governments all come across the economic problem in different ways, the only way to deal with it is resource allocation: choosing what to spend the limited resources in order to gain maximum satisfaction. This is often organised as a budget, whether within a household or the Government’s National Budget for the year. However this is only a way of dealing with the problem, it does not solve it. As the wants of consumers are unlimited and ever changing, they can never be satisfied with the limited resources of the consumer or group. A budget simply aims to make the best choices, taking the wants and resources into account.