The problem arises due to:
- Limited resources
Resources, ie. land, labour, capital, etc. are available in limited quantities in an economy and cannot produce all what people want.
- Unlimited wants
Wants of the people are unlimited and keep on multiplying and cannot be satisfied due to limited resources.
- Resources have alternative uses
A resource can be used for producing more than one product. This creates a problem. Which product should be produced or which want should be satisfied first.