central problem of an economy

The Central Problems of an Economy

The Central Problems of an Economy: Scarcity and Choice

Economics is the branch of social science which studies the human wants and their satisfaction. Human wants are unlimited and resources to satisfy these wants are limited .

The problem of allocating the scarce resources to satisfy the infinite wants is the central economic problem.

In economics, the term ‘scarcity’ means that wants are greater than resources.

The resources in an economy refers to the factors of production ie, land, labour, capital and organization.

The producers have to decide how factors of production shall be employed and the consumers have to decide which of their wants are to be satisfied. Thus scarcity and choice are the central problems of an economy.

Basic Economic Problems or Decisions Since there is the problem of scarcity of productive resources in every economy, it has to take certain basic decisions regarding the production and distribution of goods and services in the economy. These decision making process is otherwise called as the Basic economic problems of an economy .The basic economic problems faced by any country are the following.

1.What to Produce?
What to produce refers to what goods and services and in how much quantities are to be produced by the economy. The millions of people living in a country require many goods and services. But due to the scarcity of resources, the economy is not capable of producing all these goods and services. Increase in the production of one commodity will limits the production of other commodities.

2. How to Produce?
How to produce refers to the method/technique of production.

Techniques /methods/choice of production
There are mainly two methods used in production; a) Labour intensive method and b) Capital intensive method. 10Method of production in which more labour and less capital are used is called Labour Intensive method Method of production in which more capital and less labour are used is called Capital Intensive method . Labour intensive method is suitable for developing countries and capital intensive method is suitable for developed countries. E.g.; Cloth can be produced on hand looms or power looms. If hand looms are used, relatively more labour and less capital is employed.

In the case of power looms, more capital and less labor is required.

3. For whom to Produce?
For whom to produce refers how the total output is divided among consumers. Since goods and services produced are limited, all wants of the people cannot be satisfied by a country.

4. How to achieve Economic Growth?
The attainment of rapid economic growth is another basic economic problem. Economic growth refers to an increase in the real per capita income of a country. Rapid economic growth can be attained by fuller utilization of the available resources. Economic growth of an economy can be represented by an outward shift in the Production Possibility Curve.