Economic problem

The economic problem – sometimes called the basic or central economic problem – asserts that an economy's finite resources are insufficient to satisfy all human wants and needs. Economics involves the study of how to allocate resources in conditions of scarcity. However, viewing economics as the study of how society allocates resources can lead to conflation of normative economic planning and empirical study of how economic agents operate in these conditions. The economic problem – sometimes called the basic or central economic problem – asserts that an economy's finite resources are insufficient to satisfy all human wants and needs. Economics involves the study of how to allocate resources in conditions of scarcity. However, viewing economics as the study of how society allocates resources can lead to conflation of normative economic planning and empirical study of how economic agents operate in these conditions. In mainstream neoclassical economics, it is assumed that humans pursue their self-interest, and that the market mechanism best satisfies the various wants different individuals might have. These wants are often divided into individual wants (which depend on the individual's preferences and purchasing power parity) and collective wants (which are the wants of entire groups of people). Things such as food and clothing can be classified as either wants or needs, depending on what type and how often a good is requested. Economists have sometimes characterized 'how' to produce as a 'technological problem' of efficiency whereas the allocation of what is produced is an 'economic problem'. In a free market, the 'how' of production and allocation of resources is distributed among economic agents. In a centrally planned economy, a principal decides how and what to produce on behalf of agents. Modern economies are often welfare capitalist with various regulations, which makes the economic system more equitable while retaining the distributed free market system.