Central Problem of an Economy
Every economy in the world faces the economic problem of unlimited wants and limited resources. This economic problem gives rise to people making choices about how they would like to use scarce resources. This economic problem gives rise to the central problems of an economy which are as following
- What to produce and in what quantities
- How to produce?
- For whom to produce?
These are called central problems because every economy has to face them and seek solutions to them. Collectively, these central problems are called the Problem of Allocation of Resources.
WHAT TO PRODUCE: It is the problem of choosing which commodities should be produced and in what quantities. This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity.
The problem of what to produce has two aspects:
What possible commodities to produce – An economy has to decide, which consumer goods and which of the capital goods are to be produced.
How much to produce – After deciding the goods to be produced, economy has to decide the quantity of each commodity that is selected.
HOW TO PRODUCE: It is the problem of choosing method or technique of production.This problem refers to selection of
technique to be used for production of goods and services.
FOR WHOM TO PRODUCE: It is the problem of distribution of income among pactors of production which help in production. This problem refers to selection of the category of people who will ultimately consume the goods that is whether to produce goods for more poor and less rich or more rich and less poor.
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