Central problem of an Economy | Additional Study Material for Class 12 PDF Download

Q1. Define Economy. 

Ans. An economy is a system that helps to produce goods and services and enables people to earn their living. 

Q2. What is economics?  

Ans. Economics is a social science which studies the way a society chooses to use its limited resources, which have alternative uses, to produce goods and services and to distribute them among different groups of people. Professor Robins defines economics as the science 

“which studies human behaviour as a relationship between ends and scarce means which have alternative uses” 

Q3. What is the meaning of scarcity of resources? 

Ans. Scarcity of resources means shortage of resources as compared to its demand. 

Q4. Write the meaning of Economic Problem. Why does it arise? Ans. Economic problem is the problem of making the choice of the use of scarce resources for satisfying unlimited human wants. An economic problem arises because of following reasons: 

(i)    Human wants are unlimited: no human being can satisfy all his wants. One want is satisfied another takes place. 

(ii)    Wants vary in intensity: Some wants are more urgent while some are less urgent. If all wants were of the same importance there have been no problems at all. 

(iii)    Means are limited: The means to satisfy unlimited wants are limited and economy cannot produce all what people want. 

(iv)    Alternative uses: the means to satisfy our wants are not only limited but most of them have alternative uses. For example petrol is used not only in vehicles, but also for running machines, generators etc.  

Q5. What are the central problems of an economy? 

Ans. The compulsion of making choice among alternative use of resources is called central problem of an economy. Every economy faces three central problems. These are   (i) What to produce? 

(ii)    How to produce? 

(iii)    For whom to produce? 

These problems are called central problems because these are the most basic problems of an economy and all other problems resolve around them. 

Q6. Explain the problem of ‘what to produce’? 

Ans. This problem implies that which goods and services are to be produced and in what quantity. This problem arises because resources are scarce and have alternative uses. Society cannot get all what it wants from available resources. 

Q7. Explain the problem of How to produce? 

Ans. The central problem 'How to produce' is the problem of choosing the appropriate technique of production for producing goods. There can be more than one method for producing a good. More labour and less capital (i.e., labour intensive technique) or more capital and less labour (i.e., capital intensive technique) can be used for production of a good. Since resources are scarce, decision has to be taken about which technique should be used on the basis of availability of recourses. Example: A given quantity of cloth can be manufactured by combining factors of production in different proportions, making it capital-intensive or labour intensive method. 

Q8. Explain the central problem for whom to produce? 

Ans. The central problem 'for whom to produce means how the national product is to be distributed among the members of the society and who should get how much of the total amount of goods and services. This problem can be categorized under two main heads; 

(i)    Personal distribution: it means how production or national income of an economy is distributed among different groups of people. 

(ii)    Functional distribution: it means how production or national income of an economy is distributed among the factors of production. 

Q9. Why do problems related to allocation of resources in an economy arise? Explain. 

Ans. What to produce, how to produce, for whom to produce are the problems related to allocation of resources in an economy. These arise because resources are scarce and have alternative uses. The economy has to decide which possible goods and services it will produce, it has to decide whether to use more labour or more capital. It has also to decide the distribution of goods among individuals.