In an economy, the people have unlimited want for goods and services (g & s), i.e. unlimited wants, but limited are the resources in the world and so we cannot satisfy all our desires and are forced to choose as to which goods to produce.

Thus, shortage and choice or "the limited resources and the unlimited wants" add up the crucial economic problem.

Choice is determined by the following things: -

i.        Scale of the preference

ii.      Cost of the Opportunity

We can sum up this idea into the figure drawn below: -

As we are faced with the problem of the shortage, there are 3 essential economic decisions to be considered.

i)   What goods & services are to be produced and in what quantity which means to produce how much?

This concerns with the allocation of the scarce resources among the alternative uses.

ii)   How or by what method/technique goods & services should be produced?

This concerns with the choosing of the most efficient method/technique of production.

iii)  For whom are the goods & services to be produced, i.e. who are to get pleasure from the goods & services produced?

This concerns with the distribution of such goods & services.

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