The issue of choice arises, because a) the resources are scarce and b) the resources can be put to many alternative uses.
An economy confronts three fundamental economic problems, what goods and services to produce, how to produce and for whom to produce.
Capitalist economy is an economic system in which factors of production are privately owned and goods and services are produced with the objective of earning maximum profit. In a planned economic system, there is a central planning authority of the government which decides what to produce, how to produce and for whom to produce. A mixed economic system combines government planning with the free market economy.
For the growth of any economy, the resources available to the economy like labour, capital and technology should grow. If all the resources in the economy are fully employed, then the quantity of one commodity can be increased only by forgoing the quantity of other. This happens when production takes places efficiently.
If the scarce resources are also not utilized fully, it is wastage of resources. Thus, it is the duty of an economy to ensure that the scarce resources do not remain unutilized or under-utilised.
Basic Economic Activities
Production, consumption and capital formation are three basic economic activities. Production is defined as creation of utility.
Land, labour, capital and entrepreneurship are four factors of production.
Wages, interest, rent and profits are the factor payments made by the firm to the owners of factors of production. For the owners of the factor services the same are called factor incomes.
Consumption means using up of goods and services for direct satisfaction of individual and collective wants. Capital formation is the surplus of production over consumption over a period of time.