The Fundamental Economic Problem Is the Relative Scarcity of Resources”. Explain the Meaning of This Statement. What Role Do Organisations Play in Market Economies in Helping to Deal with This Fundamental Economic Problem?

For millions of people, the economic problem is extreme; satisfying even the most basic human needs is a struggle. The fundamental economic problem is the result of unlimited wants but limited resources to satisfy those wants. Scarcity is defined as the excess of human wants over what can actually be produced to fulfil those wants. Inputs are combined to produce out, inputs include such factors of productions, such as land, labour, capital etc and these are limited. In comparison to the output generated, to satisfy market wants and these wants are unlimited.

Economic problems arise from the fundamental fact of scarcity of resources, there is the problem of choice and opportunity cost. Questions and decisions need to be made about, what to produce (what goods and services should be made with the resources available), how to produce (what is the most efficient means of using the resources?) and for whom to produce. These are the three basic economic problems. Opportunity cost measures the real of cost of any choice in terms of the next best alternative given up. For example if a firm invests in project A rather than project B, project B is seen as the opportunity cost.

Organisations use a model to attempt to analyse economic problems and to explain and predict forthcoming events.

Organisations use the Production Possibility Frontier Model (PPF), to show the different maximum combinations of outputs it is possible for an economy to produce with limited resources.

The yellow line represents economic efficiency; this means the economy produces the combination of outputs that consumers want, i.e. that they most value. The purpose the PPF model is to analyse and explain the fundamental economic problem and the related ideas of opportunity cost and efficiency. It also helps to predict the effect of changes in conditions. However it assumes that two goods, given both there