Central Problems of an Economy

Central Problems of an Economy

Production, exchange and consumption of goods and services are among the basic economic activities of life. With these, society has to face scarcity of resources. This scarcity gives rise to the problem of choice. And the problem of choice is the basic problem of an economy. The Central Problems of an economy are as follows:  

(a) What is produced and in what quantities?

The first major problem faced by an economy is what types of goods and services to be produced. As resources are limited, we must choose between different alternative collection of goods and services that may be produced. It may also imply whether to produce capital/producer goods or consumer goods. Moreover, we have to decide about the quantity of the goods to be produced in the economy.

(b) How are these goods produced?

The next problem is the problem of how to produce the desired goods in the economy. Thus, the question of techniques to be used in the production comes in the mind. Whether we should use labour-intensive technique or capital – intensive technique. Labour-intensive method of production implies more use of labour per unit than capital whereas; capital-intensive technique indicates more use of capital per unit than labour. The choice depends on the availability of resources. A labour surplus economy can well use the labour–intensive technology.

(c) For whom are these goods produced?

Once we have decided what goods to be produced and what techniques to be used in the production of goods, we are encountered with another problem, i.e., the problem of distribution of goods in the economy. This is the problem of sharing of national income.The allocation of scarce resources and the distribution of the final goods and services are the central problems of any economy.

Economics Glossary

1.Economic Activities: Any human activity which is performed in exchange for money or money's worth is called an economic activity. 

2.Non-Economic Activities: Activities, which are performed not to earn money but to get some satisfaction, are called non-economic activities.

3.Primary Activities: Economic activities concerned with the exploitation of naturally occurring resources are called Primary Economic Activities.

4.Secondary Activities: Activities in which natural products of primary activities are processed and changed into other forms are called Secondary Activities.

5.Tertiary Activities: Activities which by themselves do not produce a good but they are an aid in the process of production is called Tertiary Activities.

6.Goods: we mean physical, tangible objects used to satisfy people’s wants and needs while the ‘services’, captures the intangible satisfaction of wants and needs. 

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