Central Problems of an Economy : Study Material

Central Problems of an Economy

An economic problem generally means the problem of making choices that occurs because of the scarcity of resources. It arises because people have unlimited desires but the means to satisfy that desire is limited. Therefore, satisfying all human needs is difficult with limited means.

Causes of Economic Problem

• Scarcity of resources: Resources like labour, land, and capital are insufficient as compared to the demand. Therefore, the economy cannot provide everything that people want.
• Unlimited Human Wants: Human beings’ demands and wants are unlimited which means they will never be satisfied. If a person’s one want is satisfied, they will start having new desires. People’s wants are unlimited and keep multiplying, therefore, cannot be satisfied because of limited resources.
• Alternative Uses: Resources being scarce, the same resources are used for different purposes. and it is therefore essential to make a choice among resources. For instance, petrol is used in vehicles and is also used for generators, running machines, etc. Therefore, the economy should now make a choice within the alternative uses.

List of Economic Problems:

(A) What to produce?

• A country cannot produce all goods because it has limited resources.
• It has to make a choice between different goods and services.
• Every economy has to decide what goods and services should be produced.
• Example: If a farmer has a single piece of agricultural land, then he has to make a choice between two goods, i.e., whether to grow rice or wheat.
• Similarly, our government has to decide where to allocate funds, for the production of defence goods or consumer goods, and if both, then in what proportion.

(B) How to produce?

• This problem refers to the choice of technique of production. It arises when there is an availability of more than one way to produce goods and services.
• There are mainly two techniques of production. These are:
  • Labour intensive technique(greater use of labour)
  • Capital intensive technique(greater use of machines)
• Labour intensive technique promotes employment whereas capital intensive technique promotes efficiency and growth.

(C) For whom to produce?

• The society cannot satisfy all the wants of all the people. Therefore, it has to decide who should get how much of the total output of goods and services.
• Society has to make choice of whether luxury goods or normal goods have to be produced. This distribution or proportion directly relates to the purchasing power of the economy.

Examples of Economic Problems

CHIT-CHAT TIME
(In this conversation, Raju is asking his mother to cook pizza and French fries for him. But Mother is in the dilemma that if she prepares pizza for Raju, then how she could make salad for Raju’s father.)
Raju: I want my reward for this achievement.
Mother:  Okay tell me. What do you want?
Raju: I want to eat Pizza and French fries. Please prepare it for me.
Mother: But Raju Vegetables are limited and today market is also closed and I have to prepare salad for your dad. Either I can prepare 2 Pizzas or Full plate of salad.
Raju: No, I want to eat Pizza and French Fries anyhow.
(Mother is thinking about what to prepare as vegetables are available in limited quantities.)
Mother: Ok I will prepare 1 Pizza and French Fries for you and half plate salad and French Fries for your dad.
(Mother is chopping potatoes for French fries and vegetables for pizza)
Raju: Mom, How much time you will take to prepare my meal.
Mother: Dear, wait for 20 minutes.
(Mother called Rahul, Your pizza and French fries is ready now)
Raju: Thanks Mom.
Mother: Did u like it? Is it Yummy?
Raju: Yes mom. Pizza is out of the world. But…
Mother: But.. what?
Raju: Fries served in McDonalds are different from ours, I mean shape, size and crispiness of our fries is not up to the mark.
Mother: Yeah I agree, But McDonald prepare fries with the help of automatic hi-tech machines. Dear, quality differs when goods made by automatic machines (capital intensive technique) and when goods are handmade (labour intensive techniques)
(In the above conversation Mom is trying to explain Rahul that there are two types of production techniques i.e. Capital intensive technique and labour intensive technique)
(Dad sitting on the dinner table and asking Rahul’s mother why she has prepared only half plate salad)
Father: Sneha, why have you prepared only a half plate salad for dinner today?
Mother: Today, Raju got full marks in Business studies Test.
Father: Oh wow! Great.
Mother: So he demanded to pizza. But Vegetables required to prepare pizza fell short and market was also closed.
Father: Oh! Then what did you do?
Mother: Then I thought to make fries with pizza and spared some vegetables for salad.
Father: Great job! You are smart wife and also a smart mother.  Who knows how to make optimum utilization and effective allocation of limited resources. I think you are the true economist in our home.

LETS PRACTICE