CENTRAL PROBLEMS OF AN ECONOMY

Every economy of the world, whether developed, developing or underdeveloped, is facing Economic Problems. An economic problem is basically the problem of choice in the use of scarce resources for satisfaction of unlimited human wants. It has to pick within its limited resources, what it needs to produce that gives maximum satisfaction to its people. The economic problem arises because

-          Human wants are unlimited

-          Resources are limited

-          Resources have alternative uses

Simply put, choice problem is the central problem of an economy. Scarcity of resources having alternative uses in relation to demand gives rise to the problem of choice-called central problem. Every economy has to decide how much resources are to be used in production of different goods and services. Thus, allocation of resources is the fundamental problem. Allocation of resources is concerned with:

-          what to produce

-          How to produce

-          For whom to produce

WHAT TO PRODUCE

It is the problem of choosing which commodities should be produced and in what quantities.  An economy has to choose from various kinds of goods which can be consumed viz. consumer, producer, civilian or war goods. It has to make a choice not only in the production of kinds of goods but also in the quantities in which they are to be produced.

HOW TO PRODUCE

It deals with what technique has to be used in the production of goods and services. A choice can be made between labour intensive technique and capital intensive technique.  An economy must opt for that technique which results in the least cost of production.

FOR WHOM TO PRODUCE

This is concerned with the distribution of income among its various factors of production. This problem refers to selection of the category of people who will ultimately consume the goods i.e whether the economy will produce goods for more poor and less rich or for less poor and more rich. Since no economy can satisfy all wants of its people, problem of choice arises.

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