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Central Problems of an Economy

Synopsis

There are three CENTRAL problems which are found in every economy – “What to produce?”, “How to produce?” and “For whom to produce?”.

Introduction

Central problems of an Economy refer to those problems which are faced by all economies whether it is developing or developed, whether it is capitalist, socialist, or mixed. The three main central problems are-

  1. What to produce?
  2. How to produce?
  3. For whom to produce?

What to produce?

This problem is related to what kind of goods to be produced to satisfy the needs of the people. It means whether to produce consumer goods or capital goods.

Consumer goods are those goods which are directly consumed by the consumer for the fulfillment of their satisfaction. Example – Wheat, rice, ghee, etc. Whereas capital goods are those goods which are used in the production of goods and services. Example – Tractors, Machines, etc.

At the same time, it is also highly required to decide the quantity of the goods to be produced as we have scarce resources and once they are wasted cannot be regained. It means an economy needs to decide “How much to produce?“.

How to produce?

This problem is associated with the choice of technology of production. There are two types of production technology-

Labour Intensive Technique – A technique of production in which more labour is used rather than capital. It is preferred by those economies where there is mass unemployment as it leads to employment generation.

Capital Intensive Technique – A technique of production in which more capital is used rather than labour. It leads to high efficiency in production accelerating the process of growth.

Which technique will be used by an economy depends on its economic conditions and its motive for carrying economic activities.

For whom to produce?

In every economy, there are two sections of society-

  1. Rich
  2. Poor

If the goods are produced for the poor, social welfare is promoted but it hinders the process of growth as –

Low profit of producers > Low Investment > Low GDP Growth

resulting in the backwardness of the economy for a long time.

But if goods are produced for the richer section of society, no doubt it will accelerate the process of growth but will also create social inequality on the other side.

Two Additional Problems (Specific to Underdeveloped Economies)

  • How to achieve Fuller utilization of Resources?
    1. This problem is related to under utilization of resources.
    2. Under utilization of resources = Actual output < Potential or Maximum Possible output
    3. Leading to low growth of GDP.

  • How to achieve the Growth of Resources?
    1. This problem is related to the “Problem of untapped resources”.
    2. This arises due to lack of technology.
    3. Lack of Technology > Resource Pool remains LOW > Low level of GDP

Conclusion

It is clear now that no economy can escape from these problems but can ensure the effective use of scarce resources for the maximum benefit.

Read More:

What is Economic Problem?

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