Economics: Central Problems of an Economy: Scarcity and Choice

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Scarcity is the limited availability of a commodity, which may be in demand in the market or by the commons. It is a situation where the demand is more, and supply is less.


  • Choice is a situation where individual have to choose among the given alternatives or according to resources available with him.

  • The economy also has to decide what goods and services are to be produced and how resources are to be used. Thus, the issue of ‘choice’ arises because a) the resources are scare and b) the resources can be put to many alternative uses.

Central Problems of an Economy

We may enlist three major problems facing any economy. These are:

Central Problems of an Economy

Central Problems of an Economy

Allocation of Resources

An economy also confronts three fundamental economic problems:

  • What goods and services shall be produced and in what quantities?

  • How shall goods and services be produced?

  • For Whom goods and services are to be produced?

Resource Allocation in a Capitalist Economy

Capitalist economy is an economic system in which factors of production are privately owned and goods and services are produced with the objective of earning maximum profit. In a capitalist (market-oriented) economy, there is no central authority to guide the choice of goods and services. The important characteristics of a capitalist economic system are given below:

  • Only those goods and services are produced which the consumers want.

  • Maximum quantity of goods are produced at the minimum cost per unit.

  • Goods and services are produced for everyone who can pay for them.

Resource Allocation in a Planned Economic System

In a planned economic system, there is a central planning authority of the government which decides what to produce, how to produce and for whom to produce. The planning authority sets the production targets. The government sets the goals and the firms try to meet the goals. Thus, in case of planned economies , the government decides to produce the goods and services which it thinks people should have and not what people think they should have.

Resource Allocation in a Mixed Economy

A mixed economic system combines government planning with the free market economy. No economy in the world is totally centrally planned or totally market oriented. In the mixed economic system, the choice of goods and services to be produced by the private sector depends on the basis of profit motive. The choice of goods and services to be produced by the government depends on the basis of needs and requirements of the people.

Full Utilization of Resources

If all the resources in the economy are fully employed, then the quantity of one commodity can be increased only by forgoing some quantity of the other. This happens when production takes place efficiently. As the resources are already scarce. If these scarce resources are also not utilized fully, it is wastage of resources. Thus, it is the duty of an economy to ensure that the scarce resources do not remain unutilized or under-utilized.

Growth of Resources

If resources like labour, capital and technology grow over a period of time, the problem of scarcity can be addressed. Thus, for the growth of any economy, the resources available to the economy should grow. It is only through the effective growth of resources that a society can enjoy a higher standard of living.

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