Central Problems of An Economy

Class 12 microeconomics chapter 2-Central Problems of an Economy. All Class 12 Micro Economics Notes in English medium and Hindi Medium available here.

What is an Economic Problem?

Every human being has unlimited needs but the means to satisfy those needs are limited. Similarly it is impossible for an economy to produce everything for every citizen. Therefore, every economy has to choose how to get maximum satisfaction from limited resources. For example, an economy has to decide how many resources should be used for the development of industries and how many resources should be used for the development of agriculture. This problem concerning the choice of resources is called the economic problem. Thus, by economic problems, we mean problem of choice or the problem of economical use of resources (economizing problem). In short we can say that economic problem is the problem which is concerned with getting maximum satisfaction from the proper distribution of present resources and with the growth and distribution of resources in future.

Definitions of Economics Problems

According to Leftwitch, “The economic problem is concerned with the distribution of limited resources for alternative needs of man and the use of resources to satisfy maximum needs.”

According to Eric Roll, “The economic problem is basically a problem arising from the necessity of choice. This choice is concerned with the use of limited resources with individual experiments, it is the problem of proper use of resources.

What are the Causes of Economics Problems?

Economic problems arise due to three main reasons:

.1- Unlimited Wants/Needs-

The needs of every human being are unlimited. No man can satisfy all his needs completely. There are innumerable unsatisfied needs in every society at a given point of time, which cannot be fully satisfied by the resources available in the economy. As a Matter of fact, wants of the man have been increasing day by day. For example, a few years back, there was hardly any demand for colour TV, but today almost every household is keen to get one.

2- Limited or scarce resources –

Most of the resources (goods and services) that satisfying the needs of human being, are limited or scarce. These substances are therefore called rare or scarce because their greater than their supply. ( Demand>Supply)

According to Mc Connell, “Rarity/Scarcity is the situation in which the availability of resources at a given time is less than their demand.”

3-Alternative Uses-

Each resource can be used for more than one purpose. This is called alternative use. Every individual and society has to choose which of their limited resources they should use to satisfy their needs. For example, milk is a limited/scarce commodity, it can be used for various purposes such as for drinking, for making tea or for making sweets like paneer, ice-cream etc. But the supply of milk is limited, so a household have to choose for which of his needs he should use the milk. Scarce goods are also called ‘Economic Goods’ or ‘Wealth’.

Because resources are limited, all wants cannot be satisfied. Thus occurs the problem of Choice, Which wants to be satisfied and which not. Similarly, each economy has to decide which wants are to be satisfied first and which later. In fact , the problem of choice is the main problem of economics, that is why it is called economic problem.

Economy refers to that system by which people earn their livelihood and satisfy their wants. Every economy has to face some basic economic problems. These problems are called the central problems of an economy. According to Professor Samuelson every economy faces the following 3 central problems-

1- Which goods and services should be produced and in what quantity?
2- How to produce?
3- For whom to produce?

1- Which goods and services should be produced and in what quantities?

The first and main economic problem or central problem of every economy is to determine which goods and services are to be produced, so as to satisfy the maximum needs of the people. The main reason for this problem to arise is that the needs are unlimited. But the resources of economy are limited. So each economy has to decide which goods and services are to produced and which ones are to be kept pending. Another name for this problem is the problem of choice.

An economy has to decide the following two things-

I) An economy has to decide which goods and services to produce? For example, consumer goods like sugar, textiles etc. to be produced or capital goods like machines, tractors etc. to be produced. Similarly, a choice has to be made as to which war-time items such as guns, tanks should be produced and which peace-time items should be produced?

II) When an economy decides which goods and services to produce, it also has to decide in what quantity to produce those goods? The economy has to decide how much to produce consumer goods and how much to produce capital goods.

2- How to produce?

The second main central problem facing an economy is how to produce goods. There are two techniques to produce goods. I) labor-intensive technology II) Capital-intensive technology

I) Labor Intensive Technique-(LIT): In this technique labor is used more than capital or machines. Example- agriculture.

II) Capital Intensive Technique (CIT) : In this technique capital or machines are used more than labor.

An economy has to decide which technology to use, so that production can be done more efficiently. Production should be done at minimum cost. Which technology will be adopted in the production of an economy, depends on the availability of the resources and their relative value. This problem is also called the problem of technology.

3-For whom to produce?

An economy also has to choose what to produce for? It means how to distribute production among different individuals and households. For example- welfare goods like clothes, food, food grains should be produced for the poor or luxury goods like cars, refrigerators should be produced for the rich. This problem is called the problem of distribution.

Extended version of the central problems of an Economy

The economists like Professor Stigler and Leftwitch have presented extended version of the central problems. They lay stress on the following two other central problems-

4- How to make full use of the resources?

The next main problem of every economy is to make full use of all the means of production or to provide full employment. But in reality the means of production, Land, Labour and capital are not fully utilized. Factories remain closed, workers remain unemployed, or the land is not fully utilized. Therefore, it becomes the responsibility of every economy to make full use of all resources. It is also called the problem of efficient use of resources.

5- How to develop the means?

Another main problem of every economy is to increase the level of production . This problem is called the problem of economic development. Economic development means a continuous increase in the real income of every person. In fact, the cost of economic development is the sacrificing of present consumption for future development. The goal of social justice and equality should also be achieved through economic development.

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