Central Problems of an Economy

What to produce?(Types and amount of commodities to be produced):

Land, labour, capital, machines, tools, equipment’s and natural means are limited. Every demand of every individual in the economy cannot be satisfied, so the society has to decide what commodities are to be produced and to what extent. Goods produced in an economy can be classified as consumer goods and producer goods. These goods may be further classified as single use goods and durable goods.

It is undoubtedly the basic problem of the economy. If we produce one commodity, it will mean that we are neglecting the production of the other commodity. We assume that all the factors of production in the economy are fully absorbed, so if we want to increase the production of one commodity, we will have to withdraw resources from the production of the other commodity.
On the basis of our requirements goods are further classified as goods- for necessaries, comforts and luxuries. The economy is also faced with the problem, how much goods should be produced for necessaries, comforts and luxuries.


How to produce? (Problem of the se­lection of the technique of production – choice between labour-intensive and capital-intensive techniques):

After the decision regarding the goods to be produced is taken, next problem arises as to what techniques should be adopted to produce commodity. Goods can be produced in large-scale industries or in small-scale village and cottage industries.
The economy has to decide between automatic machines and handicrafts. Hence two main options are-either capital- intensive technology (more capital and less labour) or labour-intensive technology (more labour and less capital). The economy has to decide about the technique of production on the basis of labour and capital.

For whom to produce? (Problem of distribution of income):

Goods and services produced in the economy are consumed by its citizens. The individuals may belong to economically weaker sectioned or rich class of people. Actually this is the problem of distribution. In case of capitalism the decision is taken on the basis of the purchasing powers of the consumers. Socialistic economy takes decision regarding goods and services to be produced on the basis of requirements of the individuals.

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