Question

Discuss the central problems of the economy.

The central problems of an economy are

i) What to produce?

ii) How to produce?

iii) For whom to produce?

Answer 1

i) What to produce?

Every society faces a scarcity of resources. Because we live in a finite world, our resources have to be allocated based on our collective ‘needs and wants’ as a society. This creates a problem of choice, where we might have to choose between the different products that can be produced with the same available resources. For example, consider the practice of agriculture in a village. Food production and distribution depend upon agriculture. The agricultural output of a given economy depends upon finite resources like water, manpower, fertilizers, farming equipment, etc. Therefore, the farmer has to decide what to produce based on what people want. If people tend to eat more rice and less wheat in a given region, production of wheat and rice will correspond to that tendency. (But, factors like import and export can also influence such decisions) The problem of how much to produce also has to be determined en masse. (i.e. keeping in mind the population and the demand)

ii) How to produce?

There are various techniques and methodologies that people and governments can choose from when they are producing a good or service. For example, based on the way in which capital and labour are utilized, production can happen through capital-intensive or labour-intensive methods.

iii) For whom to produce?

Every society has some degree of inequality among its members. So, when we are asking ‘for whom to produce?’, we are trying to determine who eventually benefits from the activity of economic production. Producing more luxury good will mean that only the rich can afford to consume them. In contrast, producing an extensive range of everyday goods at affordable prices can benefit low-income groups.

The three basic economic problems are regarding the allocation of the resources. These are what to produce, how to produce, and for whom to produce.