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Question
The problem, 'how to produce', is an important basic problem of an economy. Explain how it is solved in free economy? On what factors does the solution of this problem depend?
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Solution
- The problem of ‘how to produce’ means which combination of resources is
to be used for the production of goods and which technology is to be made use
of in production. Once the society has decided what goods and services are to
be produced and in what quantities, it must then decide how these goods shall
be produced. There are various alternative methods of producing a good and the
economy has to choose among them.
- For example, cloth can be produced either with automatic looms or with
power looms or with handlooms. Fields can be irrigated (and hence wheat can be
produced) by building small irrigation works like tube-wells and tanks or by
building large canals and dams. Therefore, the economy has to decide whether
cloth is to be produced by handlooms or power looms or automatic looms.
Similarly, it has to be decided if irrigation has to be done by minor
irrigation works or by major works. Obviously, it is a problem of the choice of
production techniques.
- Different methods or techniques of production would use different quantities
of various resources. For instance, the production of cloth with handloom would
make use of more labour and less capital. Production by handloom is, therefore,
called labour-intensive technique of production. Production of cloth with powerloom or automatic loom would utilise less labour and more capital. Production
with powerlooms is, therefore, called capital-intensive technique. Thus, the economy has to choose whether it wants to use for production
labour-intensive methods or capital-intensive methods of production.
- Obviously, the choice between different methods would depend on the
factor-supply situation and the prices of the factors of production. The
criterion, it is obvious, must be the cost of production. It is well known that
the resources are scarce. However, some resources are more scarce than others. It is
in society’s interest that those methods of production are employed that make
the greatest use of relatively plentiful resources or, conversely,
economies as much as possible on the relatively scarce resources.
- The problem of ‘how to produce’ means which combination of resources is
to be used for the production of goods and which technology is to be made use
of in production. Once the society has decided what goods and services are to
be produced and in what quantities, it must then decide how these goods shall
be produced. There are various alternative methods of producing a good and the
economy has to choose among them.
- For example, cloth can be produced either with automatic looms or with
power looms or with handlooms. Fields can be irrigated (and hence wheat can be
produced) by building small irrigation works like tube-wells and tanks or by
building large canals and dams. Therefore, the economy has to decide whether
cloth is to be produced by handlooms or power looms or automatic looms.
Similarly, it has to be decided if irrigation has to be done by minor
irrigation works or by major works. Obviously, it is a problem of the choice of
production techniques.
- Different methods or techniques of production would use different quantities
of various resources. For instance, the production of cloth with handloom would
make use of more labour and less capital. Production by handloom is, therefore,
called labour-intensive technique of production. Production of cloth with powerloom or automatic loom would utilise less labour and more capital. Production
with powerlooms is, therefore, called capital-intensive technique. Thus, the economy has to choose whether it wants to use for production
labour-intensive methods or capital-intensive methods of production.
- Obviously, the choice between different methods would depend on the factor-supply situation and the prices of the factors of production. The criterion, it is obvious, must be the cost of production. It is well known that the resources are scarce. However, some resources are more scarce than others. It is in society’s interest that those methods of production are employed that make the greatest use of relatively plentiful resources or, conversely, economies as much as possible on the relatively scarce resources.
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