Central problems of an economy

 

CENTRAL PROBLEMS OF AN ECONOMY


Meaning

The central problems of an economy arise due to scarcity of resources and unlimited human wants. Since resources are limited, every economy must make choices about how to use them efficiently.

These problems are faced by all types of economies — capitalist, socialist and mixed.

Three Central Problems of an Economy


1. What to Produce?


This problem relates to the selection of goods and services to be produced. The economy has to decide:

Which goods should be produced?

How much of each good should be produced?

Should more resources be used for consumer goods or capital goods?

Example: Should more resources be used to produce food or luxury cars?

2. How to Produce?

This problem concerns the choice of technique of production. The economy has to decide:

Whether to use labour-intensive methods or capital-intensive methods

How to combine land, labour and capital

Which technology should be used

Example: Should wheat be produced using machines or manual labour?

3. For Whom to Produce?

This problem deals with the distribution of goods and services. The economy has to decide:

How income should be distributed

Who will consume the goods produced

How much each person will get

Example: Will goods be for the rich only or also for the poor?

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