The economic problem arises because the supply of resources is limited in relation to the wants of individuals. Wants are defined as human desires for goods and services, which satisfy demands. Wants are classified according to their nature, and range from basic wants, to collective wants, to luxury wants. Some wants are non-economic related, such as the breathing of air, and because of this, there are no choices in terms of alternative, therefore they produce no opportunity cost. However, there are very few of these free goods, and this is partly seen in the statement in which Mr Farujia quoted from Milton Friedman, who said, "there's no such thing as a free lunch".
The economic problem involves the scarcity of resources in relation to wants, and because of this, choices have to be made about how resources will be used in production. Scarcity arises when the demand for goods or services exceeds the supply of resources used to produce those goods or services at any particular time. Choices therefore need to be made about which wants and needs are a priority, and which are can be settled in the future.
The choices that arise from the scarcity of resources include: What and how much to produce? How to produce and to whom to distribute? What to produce is concerned with what types of goods and services should be produced. The distinction is between consumer and capital goods, with consumer goods being benefits in the present, while capital goods, such as machines and factories, provide for the future production of goods and services. How much to produce details what quantities of goods and services should be produced. How to produce depends on the resource availability and level of technology, but mostly refers to the most productively efficient method, the one that has minimal resource cost. For whom to produce depends on factor incomes and the provision of welfare. It covers "how the fruits of production are to be handed out in society".
