L8

Central Problems of an Economy:

The primary economic activities of life are the production, distribution, and disposition of goods and services. A society will be facing a scarcity of resources during the time of fulfilment of these activities. Scarcity is evident due to the availability of limited resources and human needs having no limit. This variation between supply and demand leads to central problems in an economy.

The central problems of an economy revolve around the following factors:

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

What to produce?

It is one of the central problems in an economy. It is related to the type and quantity of goods and services that need to be produced.

Since resources are in limited quantities, producing more of one good will result in less production of the other.

How to produce?

This aspect deals with the process or technique by which the goods and services can be produced. Generally, there are two techniques of production:

1. Labour intensive techniques
2. Capital intensive techniques

The choice of technique for production depends on the availability of the resource in that nation, hence resource allocation becomes a challenge.

For whom to produce?

This problem deals with determining the final consumers of the goods produced. As resources are scarce in an economy, it becomes difficult to cater to all sections of the society.

It leads to a problem of choice in an economy as a good that may be in demand among one section, may not be in demand for another section of the society.

Such a situation arises due to the difference in income distribution among the population, which causes a change in buying behaviour.