Basic Problems of an Economy

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In economy and its processes one of the processes is production. In the production process the producer face many problems such as what to produce, how much to produce, how to produce and for whom to produce.

Scarcity of Resources:

Unlimited Wants:

  • Human wants keep on growing. They grow because of:

  • Growth of knowledge

  • Desire for change

  • Desire for better and better living

Limited Resources:

  • Consumption is the act of satisfying the wants.

  • Because of limited income all wants cannot be satisfied.

  • Income is the source of an individual by which he can satisfy his wants.

  • Thus, income is a scare resource for individual.

Scarcity of Resources:

  • Goods and services that we buy to satisfy of resources in the context of an economy.

  • Resources are also categories as land, labour, capital and entrepreneur.

  • In any economy these resources are available in limited quantities.

  • So, its produce limited quantities and types of goods and services.

  • Resources are scare means demand is more than its supply.

Alternative Uses of Resources

  • When resources can be used for producing different goods and services is called alternative uses.

  • Once a resources of an economy can be used for producing particular goods and services. The same will not be available for producing other goods and services.

  • For example: If a price of land is used for cultivating wheat, the same land is not available for cultivation of rise and other crops.

Economic Problems

  • An economy cannot produce all what it wants.

  • Making such a choice is the economic problem.

  • Problem of choice is faced by both consumers as well as producers.

  • Producers face this problem in form of allocating the scares resources on the production of various goods and services.

  • Consumers face this problem in form of allocation of their limited income on various goods and services.

  • Scarcity of resources and their alternative uses cause the problem of choice.

For example:

  • In a farm both Wheat and sugarcane can be produced an economic problem arises such as What be cultivated, In what proportion be both cultivated?

  • Problem of choice arises in case of technique of production such as in what proportion should labour and capital be used?

  • Economising of resources problem arises means resources are scares, so, every economy try to best possible use of resources.

Central Problem of an Economy

Meaning:

  • Every economy is it poor or rich, big or small, developed or underdeveloped, socialist or capitalist or any other type face the problem of limited resources.

  • Problem arising out of the scarcity of resources and alternative use is called central problem.

Types of Central Problem:

(I) What to produce and in what quantities?

  • Every economy has limited resources. So, can’t produce all that is wanted by people.

  • Hence, the problem arises such as what goods and services are to be produces and in what quantity.

(II) How to produce?

  • Problem how to produce relates to the choice of technique of production arises.

  • For example: Labour and capital can be used in different proportion for producing goods.

  • Labour incentive techniques: When labour more than capital is used in different proportion of goods.

  • Capital intensive techniques: When capital more than labour is used in proportion of goods.

(III) For whom to produce?

  • Whatever is produced in an economy cannot meet everybody’s wants.

  • So, who will get and how much get problem are arises.

  • This is the problem of distribution of whatever is produced in an economy among different groups.