The Economic Problem
Economics is considered a social science because it studies the tendencies of human behaviour. Its overarching question of study is widely known as the ‘economic problem’.
The economic problem centres on how to satisfy unlimited wants with limited resources. It suggests that humans have limitless wants but scarce resources to satisfy them. We are therefore unable to satisfy all our wants and must choose between them according to preference. Economics is essentially about allocating our scare resources in the best and most efficient way to satisfy the maximum number of our limitless wants.
The concept that by satisfying one want, we are sacrificing the opportunity to satisfy a substitute want. Therefore the price of satisfying one want is the value of the want we have to forgo, known as the opportunity cost.
Goods such as food, water and shelter and services such as health and education are classified as human needs. Individuals want a range of goods and services which may make their lives easier, more enjoyable or luxurious. They are classified into specific categories:
- Basic wants (needs) – are goods or services that all individuals must satisfy to some degree to survive. They can include: food, water, clothing and shelter.
- Reoccurring wants – are the wants that must be continually satisfied, or satisfied at regular intervals. e.g: Food and water so that people can survive.
- Substitute wants – Are wants that are interchangeable, such as buying a soft drink when instead of water. Or a used car instead of a new car.
- Luxury wants – are the desires for goods and services which satisfy needs in excess of basic wants/needs for survival. e.g: Holidays, computers etc.
- Complementary wants – Refer to wants which are derived from other wants. e.g: wanting petrol because you own a car.
- Individual wants – are the wants of each person according to their preferences.
- Collective wants – are the wants demanded by a community or a group of people such as healthcare, education, defense, police etc.
Wants may vary from individual to individual depending on their age, gender, budget, geographical location and personalities.
Consumer sovereignty is the idea that the needs and wants of consumers determines the output and resource allocation of producers. Through their spending patterns, consumers express their preferences in the market. Businesses seek to maximise their profits by catering to the demands of consumers and therefore consumers have the power to determine what is produced in the economy.