Central Problems Of An Economy

What is Central Problems Of An Economy?

We know that resources limited in relation to the unlimited wants, it is important to economise their use and utilise them in the most efficient manner.

It leads to the following central problems that are faced by every economy.   

  1. What to produce
  2. How to produce
  3. For whom to produce
  1. What to produce: It is basically the problem of selection of commodities and their quantities to be produced. There is a limited resource, and thus producers can’t produce all the goods, in an economy.

So, every economy has this problem that what to produce and in what quantities. It has two dimensions.

(a) Kinds of goods to be produced

(b) Quantity of goods to be produced

  1. How to produce: this problem refers to the selection of technique to be used for the production of goods and services.

There are various techniques available to produce goods.  

(a) Labour Intensive Technique (greater use of labour)

(b) Capital Intensive Technique (greater use of machines)    

Choice of technique mainly depends upon the availability of resources, structure of economy and policies of the government. Thus it is difficult to allocate the resource efficiently and effectively.

  1. For whom to produce: Due to lack of resource in every economy, can’t satisfy all the wants of its people. So, there is a problem to select the category of people who consume the goods. Whether to produce goods for the rich section or poor section of society or more for rich and less for the poor section.    

The allocation of scares resources and the distribution of the final goods and services are the central problem of the economy.

The Reason behind these central problems is the compulsion of making choices among alternative uses of scarce resources to get maximum satisfaction.

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