CENTRAL PROBLEMS OF AN ECONOMY

Central problems of an economy

Central problems of an economy are the problems related to produce which type of goods and in which quantity, to produce goods and services in the economy by using which technique of production and to produce goods and services in the economy for which section of society from the available resources. 

Central problems

(1) What to produce

(2) How to produce

(3) For whom to produce

(1) What to produce

What to produce means to produce which type of goods and in which quantity from the available resources. 

There are two type of goods

(a) Capital goods

(b) Consumer goods

Production of both capital and consumer goods is essential for the economy. Capital goods are needed for further production and future growth. Consumer goods are needed for present consumption. If the available resources are used largely for the production of consumer goods, the present generation will enjoy good quality of life. But lack of capital goods would mean lack of future growth. If the available resources are largely used for production of capital goods the future growth would be high but the lack of consumer goods would mean that the present generation will have low standard of living. Hence the problem of choice arises between the production of capital and consumer goods. 

(2) How to produce

How to produce means to produce goods and services in the economy by using which technique of production from the available resources. 

There are two techniques of production

(a) Labour intensive technique

(b) Capital intensive technique

Capital intensive technique promotes efficiency. It accelerates path of growth. On the other hand labour intensive technique promotes employment. The choice between labour intensive technique and capital intensive technique becomes a problem because labour intensive technique helps in reducing unemployment, while capital intensive technique accelerates GDP growth. 

(3) For whom to produce

For whom to produce means to produce goods and services in the economy for which section of the society from the available resources. 

Every economy has two sections of the society. 

(a) Rich

(b) The poor

Social justice is promoted if more goods are produced for the poor. It would reduce inequality and promotes equality. By producing goods for the poor the profits of the producers would remain low. Low profits would mean low investment. Implying low GDP growth. On the other hand By producing goods for rich people the profits of the producers would increase, Increase in profit would mean increase in investment. Implying high GDP growth. Thus there is a problem of choice:  produce goods for rich people or the poor. 

Solutions to central problems in different economies

1. Market economy

(a) What to produce- This economy will produce more of capital goods. 

(b) How to produce- This economy will produce more goods by using capital intensive technique. 

(c) For whom to produce- This economy will produce more goods for rich people. 

2. Centrally planned economy

(a) What to produce- This economy will produce more of consumer goods. 

(b) How to produce- This economy will produce more goods by using labour intensive technique. 

(c) For whom to produce- This economy will produce more goods for the poor. 

3. Mixed economy

(a) What to produce- This economy will produce both consumer and capital goods. 

(b) How to produce- This economy will produce goods by using both capital and labour intensive technique. 

(c) For whom to produce- This economy will produce goods for both rich and the poor.