Three Central Problems of an Economy - Economics NCERT/CBSE Class 12th/Std XII Video Lecture

Central Problems of an Economy
The Central problems of an Economy refer to
problems of allocation of limited resources
to satisfy various human wants.
Human wants are unlimited. But resources to
satisfy those wants are limited. Also, some
of these limited resources have alternate
uses. For example, water can be used for a
variety of purposes like drinking, washing
clothes, bathing etc. This situation gives
rise to following problems which are the central
problems of an economy-
1. What to produce? - The problem of what
to produce involves the selection of goods
and services to be produced as well as quantities
in which they should be produced.
It is related to the choice between
- Luxury and Necessary goods,
Or
- Consumer and Defence goods,
Or
- Capital and Consumer goods, etc.
As the available resources are limited, so
all the goods can't be produced in the quantity
desired by us. Hence this problem. For example,
metals can be used to make machinery, utensils
or car. As metals are limited in quantity,
so the goods which metals can produce can't
be produced in a desired quantity. Hence the
problem of what to produce arises.
2. How to produce?
This problem involves deciding the type of
technology which should be used for production.
There are basically two types of technology
Labour Intensive Technology: This technology
requires more labour & less capital.
Capital Intensive Technology: This technology
requires more capital & less labour
Capital intensive technology will lower the
cost and increase the speed of production.
On the other hand, labour intensive technology
provides more employment or jobs. This gives
rise to the problem of choice among these
two technologies.
For example, Cloth can be produced by power
looms as well as handlooms. Power looms reduce
the cost and give more output. On the other
hand, handlooms provide more employment. This
gives rise to the problem of how to produce.
3. Third problem is "For whom to produce"?
This problem is related to the distribution
of goods & service in the economy.
It is related to the choice between
- Production of goods and services for richer
section of society
Or
- Production of goods and services for the poorer
section of society
Production of goods and service for poor leads
to maximum social welfare, whereas production
of goods and services for rich leads to more
profit. For example, if an economy concentrates
on the production of luxury goods, then this
will improve the standard of living of rich
class, but the life of poor will be more difficult.
On the flip side, if an economy concentrates
on the production of necessary goods, then
this will serve the society but profits will
reduce. Hence the problem of "for whom to
produce" arises.