BASIC PROBLEMS OF AN ECONOMY
(CENTRAL PROBLEMS OF ECONOMY)
THE BASIC ECONOMIC PROBLEMS ARE THE FUNDAMENTAL
ISSUES THAT ALL ECONOMIES MUST ADDRESS IN ORDER TO
FUNCTION EFFECTIVELY. THESE PROBLEMS ARISE FROM THE
FACT THAT RESOURCES ARE SCARCE, BUT HUMAN WANTS ARE
UNLIMITED.
THE THREE BASIC ECONOMIC PROBLEMS ARE:
[Link] of resources implies that decisions must
be made, which in turn involves choice.
The economic problem is the choice one must make,
arising out of limited means and unlimited wants.
It has to answer three fundamental questions.
WHAT TO PRODUCE?
THIS PROBLEM REFERS TO THE QUESTION OF WHICH GOODS AND
SERVICES TO PRODUCE, AND IN WHAT QUANTITIES.
THERE ARE MANY DIFFERENT GOODS AND SERVICES THAT COULD
BE PRODUCED, BUT RESOURCES ARE LIMITED, SO NOT ALL OF THEM
CAN BE PRODUCED.
THE ECONOMY MUST DECIDE WHICH GOODS AND SERVICES ARE
MOST IMPORTANT TO PRODUCE, AND HOW MUCH OF EACH TO
PRODUCE.
HOW TO PRODUCE?
THIS PROBLEM REFERS TO THE QUESTION OF HOW TO
PRODUCE GOODS AND SERVICES.
THERE ARE MANY DIFFERENT WAYS TO PRODUCE A
GIVEN GOOD OR SERVICE, BUT SOME METHODS ARE
MORE EFFICIENT THAN OTHERS.
THE ECONOMY MUST DECIDE WHICH METHODS OF
PRODUCTION TO USE, IN ORDER TO PRODUCE GOODS
AND SERVICES AT THE LOWEST POSSIBLE COST.
FOR WHOM TO PRODUCE?
THIS PROBLEM REFERS TO THE QUESTION OF WHO
GETS TO CONSUME THE GOODS AND SERVICES THAT
ARE PRODUCED.
THERE ARE MANY DIFFERENT PEOPLE IN AN ECONOMY,
AND THEY ALL HAVE DIFFERENT WANTS AND NEEDS.
THE ECONOMY MUST DECIDE HOW TO DISTRIBUTE THE
GOODS AND SERVICES THAT ARE PRODUCED, IN ORDER
TO MEET THE NEEDS OF AS MANY PEOPLE AS POSSIBLE.
THESE THREE BASIC ECONOMIC PROBLEMS ARE
INTERRELATED. THE DECISIONS MADE ABOUT WHAT TO
PRODUCE WILL AFFECT THE DECISIONS MADE ABOUT
HOW TO PRODUCE, AND THE DECISIONS MADE ABOUT
FOR WHOM TO PRODUCE WILL ALSO AFFECT THE
DECISIONS MADE ABOUT WHAT TO PRODUCE AND HOW
TO PRODUCE.
IN ADDITION TO THESE THREE BASIC ECONOMIC
PROBLEMS, THERE ARE OTHER ECONOMIC
PROBLEMS THAT ECONOMIES MUST ALSO
ADDRESS. THESE INCLUDE PROBLEMS SUCH AS
ECONOMIC GROWTH, INFLATION, UNEMPLOYMENT,
AND POVERTY. HOWEVER, THE THREE BASIC
ECONOMIC PROBLEMS ARE THE FOUNDATION OF
ALL ECONOMIC ACTIVITY, AND THEY MUST BE
ADDRESSED IN ORDER FOR AN ECONOMY TO
FUNCTION EFFECTIVELY.
HERE ARE SOME
EXAMPLES OF HOW THE
BASIC ECONOMIC
PROBLEMS MANIFEST IN
THE REAL WORLD:
THE WHAT TO PRODUCE PROBLEM IS
EVIDENT IN THE DECISIONS THAT
GOVERNMENTS MAKE ABOUT HOW TO
ALLOCATE RESOURCES. FOR EXAMPLE, A
GOVERNMENT MIGHT DECIDE TO INVEST
IN EDUCATION, HEALTHCARE, OR
INFRASTRUCTURE, RATHER THAN IN
MILITARY SPENDING.
THE HOW TO PRODUCE PROBLEM IS
EVIDENT IN THE DECISIONS THAT
BUSINESSES MAKE ABOUT HOW TO
PRODUCE THEIR GOODS AND
SERVICES. FOR EXAMPLE, A BUSINESS
MIGHT DECIDE TO AUTOMATE ITS
PRODUCTION PROCESS, IN ORDER TO
REDUCE COSTS.
THE FOR WHOM TO
PRODUCE PROBLEM IS EVIDENT IN THE
DISTRIBUTION OF INCOME AND
WEALTH IN AN ECONOMY. FOR
EXAMPLE, A COUNTRY WITH A HIGH
LEVEL OF INEQUALITY MIGHT HAVE A
LARGE GAP BETWEEN THE RICH AND
THE POOR.
THE BASIC ECONOMIC PROBLEMS ARE
COMPLEX AND CHALLENGING, BUT THEY ARE
ALSO ESSENTIAL TO UNDERSTANDING HOW
ECONOMIES WORK. BY UNDERSTANDING
THESE PROBLEMS, WE CAN BETTER
UNDERSTAND THE CHOICES THAT
GOVERNMENTS AND BUSINESSES MAKE, AND
THE IMPACT OF THESE CHOICES ON OUR
LIVES.
II. Growth of Resources
Economic systems must ensure economic growth.
Owing to scarcity of resources, the society must know whether its capacity to produce
goods and services is expanding or decreasing.
Some major ways to promote economic growth include ensuring adequate rate of growth
of per capita income, improvement in technology through the adoption of superior
techniques of production, and better and more extensive education and training of the
labor force and others.
The resources of the Economy must grow by all means. An increase in the supply of
resources in a country leads to greater production, economic development and national
prosperity.
.
III Fuller Utilisation of Resources
• Another problem that an economy has to solve is the fuller employment of resources.
• It should be fully utilized for the growth of resources.
• Society must also ensure full employment. It is the task of economic systems to ensure
that resources are not idle or unemployed, since resources are scarce. In the market
economy, full employment is achieved by stimulating demand
• As economic resources are scarce, the economy has to decide how much resources
are to be used for the present generation and how much resource for the future
generation.
• Use of more resources at present means less of it will be available future and vice
versa. An economy has to maintain a balance between present and future with regard
to resource use.
IV. The Choice between the Present and Future (How to achieve
Economic Growth)
The society has to decide how much goods to be produced for the
present generation and how much for the generation to come (future
generation).
In other words, this implies how much consumer goods are to be
produced and how much producer‘s goods are to be produced. This is a
choice between the present and future.