Question

Discuss what is meant by the “Economic Problem.” Explain the different economic systems and their characteristics that have been developed to deal with this problem.

Answer 1

ECONOMIC PROBLEM.

• Economic problem, also known as 'central problems' or as'fundamental problems' are the fundamental theories in the operation of an economy.
• All economies face economic problems due to the scarcity of resources.
• It is the problem of how to make the best optimum utilisaton of the scarce resources.
• The economic problem exist due to the unlimited wants of the people which cannot be met by the limited resources.
• Economic problems are subjected to the concepts of choice and opportunity cost. Opportunity cost are the costs for the next best alternative forgone.
• As the resources are limited, the producers and consumers have to make choice between the alternatives.
• Individulas must decide how to use their skills and efforts, producers must decide how to best use their workers and machinery and Government should decide how to utilize their tax revenue.
• Choosing an alternative choice creates a sacrifce.
• Famous economist Paul Samuelson put forward 3 main questions that relates to the economic problem and they are :

1. "what to produce?" : the socities have to decide what kind goods and in what quantities have to be produced to meet their unlimited wants.
2. "how to produce?" : the socities have to decide the what combination of factors have to be used for producing these goods. They can either opt for capital intensive technology or labour intensive technology.
3. "for whom to produce?" : finally the society has to decide whom should benefit from these economic activites.

DIFFERENT ECONOMIC SYSTEM AND THEIR CHARACTERISTICS.

There are mainly 4 types of economic systems as follows:

Traditional Economic System :

• ​​​​​​​​​​​It is the traditional economic system of the world.​​​​​​
• These economies produce products and services that have an influence of their traditions, beliefs , customs and religions.
• These systems basically follows farming.
• The areas which follows these traditional system tends to be rural.
• These economies does not experience much profits or surplus. And if there is surplus , it is not either distributed or wasted.
• The major advantage of this system is that the traditions and customs are preserved.
• But they are unable to enjoy the benefits that are enjoyed by the other economies.

Command Economic System :

• This economic system have some changes from the traditional economic system or it is an improved version of traditional economic system.
• The main feature of this economic system is that these economies will have a centralised authority to control.
• This kind of economy is formed when it have abundant resources to stand itself.
• Under this system the centralised aunthority will able to distribute the resources efficiently at a good price to public.
• But the control of Government will only be focused on those valuable resources and not on the others.

Market Economic System :

• ​​​​​​​This kind of economy is similar to free market.
• The Government does not have any control on the resources, the people who run the organizations decides the supply, demand etc.
• The major advantage of this economy is that it will be a well controlled and safe economy.
• Under this, the Government will control the most profitable and important economies and the rest Is given to the public.

Mixed Economic System:

• ​​​​​​​This economy is a mixture of command and market economy.
• Under this ,the major areas will be controlled by the government and the rest will be controlled by the public.
• The market is more or less free of Government ownership.