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Solution of Central Problems of an Economy

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

Solution of central problems in different economies

Different types of economies solve central problems in different ways. Mainly economies can be divided into three parts.


1-Capitalist Economy or Market Economy

A capitalist economy is a free economy in which producers are free to decide what, how and for whom to produce. In a capitalist economy or a market economy, the government has no control over economic activities. The economic activities are depend on the autonomous actions of market forces (demand and supply) in the economy. Producers are free to decide their production on the market’s force of demands and supply. The main objective of this type of economy is to earn profit.

Solution of Central Problems of an Economy under a Capitalist Economy

In Capitalist or market economy, Producers will produce those goods and services, whose demand is high and supply is low. They will earn more profits on production of such goods and services. Producers will use the those means of production those costs them less in order to receive maximum benefits. In a free economy, producer will produce goods for a class that is capable of paying a higher price, so that producers may receive the maximum benefits. Example – America, England. 

2. Socialist Economy or Centrally Planned Economy

Socialist economy or central planning bound economy is that in which economic activity control by a central authority or government. All decisions like How the economy should be producing for, how to produce, are decided by a central authority or an officer designated by the government. The main objective of the Socialist economy is not to earn profits but is to maximize social welfare.

Solution of Central Problems of an Economy under a social economy or centrally planned economy

In a socialist economy, such goods and services are produced which, in the opinion of the government, are most useful to the society. Such techniques of production are used , which are most useful to the society. For example, if there is a situation of unemployment in a socialist economy, the government uses labor – intensive techniques (LIT) so that maximum number of people get employment. For poor people, the economy will produce enough goods and services, even though the product from the production of these items are not getting any special benefits. In this economy more priority is given to social justice than the maximum profit. Example-  China, Russia , Cuba etc.

3- Mixed Economy

A mixed economy has the characteristics of both a capitalist economy and a socialist economy. In these types of economies, economic activities are left to independent market forces , but the government also maintains its control over the economy and the market. Thus the economy is left free for private sector economic activity, but some public areas of welfare are under the Government control. The main objective of these economies is to increase social welfare with maximum benefits.

Solution of Central Problems of an Economy under a mixed economy

In a mixed economy the decisions about wha , how and for whom to produce are taken on the basis of market forces as well as social welfare. Some areas of the product that are free to take decisions aimed at maximizing profit, but taking into account the social welfare in some areas are to decided by the Government. For example, in most sectors in India, producers have the freedom to maximize their profits, but in areas related to public welfare like railways, etc., the government has complete control. So that the poor section of the society can also get the services of railways etc.

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