The Problem of Choice

Class 09 Social Science

Some of our preferences are needs, such as essentials like food, water, and shelter, while others are wants, like gadgets, vacations, or luxury items. Human wants are unlimited and keep changing; for instance, people may want to upgrade from a bicycle to a motorbike and then to a car.

Choices and Limited Resources

Resources are required to satisfy human needs and wants. However, both natural and human-made resources are limited in quantity. They can be put to many alternative uses such as allocating money to buy fruit or a pair of shoes. Not just households, economies also have to decide how to use their scarce resources in the best possible way to meet unlimited wants and improve people’s quality of life.

When one alternative is chosen, the other options are given up. The value of what is given up is known as the opportunity cost.

Imagine that a farmer has a piece of land and can choose to grow either barley or wheat on it. With limited land, water, and labour, the farmer must decide how much of each crop to produce. Production Possibility Curve (PPC) shows the trade-off between barley and wheat produced.

What does Economics Deal with?

Since resources have competing uses, individuals, enterprises, and governments must decide how to best allocate them, as these decisions affect the well-being of people and society as a whole. The discipline of Economics deals with how choices are made by optimising the use of limited resources to satisfy the needs and wants.

It explains how different economic entities - consumers, producers, governments, and financial institutions - interact in an economy. For example, how people work and earn wages, how wealth and resources are distributed, how prices are determined in the market, how education and technology drive investment, and how government policies and trade influence prices in the market, employment, and so on.

Key Questions in Economics

Any mismatch between unlimited wants and limited resources gives rise to three key questions that the discipline of economics seeks to address.

What to Produce and for Whom?

This fundamental question concerns which goods and services, and in what quantities, should be produced to meet the needs of the economy over a given period. For instance, should farmers produce water-intensive crops such as sugarcane and paddy, or drought- resistant crops such as millets and pulses? Producing sugarcane yields high profits and supports industries such as sugar, whereas producing millets and pulses saves water, improves soil health, and promotes sustainable agriculture.

The question of ‘for whom to produce’ delves into the purpose of goods and services produced, how they are produced and distributed, and who benefits from their production.

How to Produce?

After deciding what to produce, the next question is how to produce it - which methods, resources, and technologies should be used. For example, whether a manufacturer should automate processes or employ more labour for producing goods.

To answer this question, producers must select the right mix of factors of production: land, labour, capital, and technology. Production can be labour-intensive (using more workers and less machinery) or capital-intensive (using more machines and technology and less workers).

Economic Systems and How Choices are Made

In an economy, the answers to these three key questions depend on how the resources used to produce goods and services are organised and who controls the decision-making regarding them. The system that defines the mechanisms for the production, consumption, and distribution of goods, services, and resources is known as the economic system of a country.

Planned Economy

In a planned economy, a central planning authority of the government, such as the planning commission, makes all major economic decisions in the market, that is, what and how much will be produced, how they will be produced, and who will get to use them and at what prices. The government has ownership in most resources and sectors like land, factories, banks, and transport.

With limited private ownership, enterprises usually follow the central authority’s targets rather than market demand, and are heavily regulated by the government through strict permits and licenses to produce goods and services. However, this prevents a large number of enterprises to operate in the market and thus restricts competition among private enterprises. As a result, there is little motivation among enterprises to improve quality or innovate. Some examples of planned economies are the former Soviet Union, North Korea, and Cuba.

Market Economy

In a market economy, the questions of what, how, and how much to produce are addressed mainly by the forces of demand and supply with little government intervention. Often, the government acts like a referee in a football match. It ensures safety and law and order, and it does not control prices or production. The ownership of factories, shops, land, and other resources, largely rests with individuals and private companies.

Many producers offer similar products, which encourages better quality, lower prices, and innovation in production of goods and services. Some of the prominent examples include the United States of America, Japan, and Hong Kong. However, governments play an important role even in these economies.

Mixed Economy

A mixed economy combines features of both market and planned economies. In this system, private individuals, enterprises, and the government play important roles in making economic choices and decisions. We also find large public sector companies that play a very improtant role in the market. In reality, most economies have features of mixed economic systems that allow the existence of private ownership, with some degree of government regulation.

A few examples of mixed economies include India (post-1991), China (post-1978), Germany, and Sweden. Even market economies like the United States of America and Singapore have significant government involvement in the market.