The economic problem occurs because of the fact that the supply of resources used to produce goods and services are limited or finite but there is an infinite amount of demands and wants of individuals. In other words, the economic problem is consequence of limited resources, but unlimited wants.
Individuals must decide what is the best item to buy with their limited resources. This is called opportunity cost, which involves the consumer determining which goods and services will provide the most satisfaction and value for money. In market economies, consumers have sovereignty over the market and thus they influence which products are produced and the amount produced. However, many businesses persuasively advertise unwanted or unnecessary goods and services to certain consumers, which can result in a misallocation of resources.
In accordance to the economic problem, businesses have a number of issues to address: What to produce? How to produce? How much to produce? To whom to distribute?
ÃÂ§ What to produce - Firms must decide which production combination of goods and services will involves the least cost but result in the largest amount of produce
ÃÂ§ How to produce - refers to what method of production of the selected goods and services Is the most cost effective and efficient
ÃÂ§ How much to produce - involves predicting the amount of goods and services that will be needed and demanded.
Using these statistics, the business will attempt to produce a quantity of goods equal to or as close as possible to that amount. This prediction is usually based on the amount of consumption, demand and profit of the previous year.
ÃÂ§ To whom to distribute - the ratio of distribution of goods and services across the country, state or region, according to consumer demands and availability of transport.