Discuss the central problems of an economy.
Every economy faces three central problems due to scarce
availability of resources. This scarcity challenges the best
possible usage of these available resources to fulfil the
unlimited demands. The three central problems of an economy are
What to produce and in what quantities?
The very first problem encountered by any economy is to decide
what goods are to be produced and in what quantities or amount.
There is a lot to be decided; whether to produce consumer goods
or luxury goods; agricultural goods or investment goods; whether
to cater education and healthcare sector or to strengthen
military. An appropriate example was set by the Latin American
nation Costa Rica; they dismantled their military in 1949 and
invested the money, which earlier was spent on the maintenance of
their army, on education and healthcare. Once it is decided, what
to produce, the next decision is to estimate the amount or
quantity of the production. So the economy constantly struggles
to choose what to produce and in what quantities.
How to produce?
The second problem that arrives is how to harvest the
given or available resources? That is, what technique is to be
used for producing various goods and services? It depends majorly
endowment of resources in deciding the optimum technique. It has
to be decided whether efficient production is possible through
labour-intensive or capital-intensive techniques. This decision
rest on the present economic conditions and also that the
selected technique shall not only reduce the cost of production
but also add to the social and economic welfare. For example, if
a country is facing wide unemployment possibly due to huge
population, then it is wise to opt for labour-intensive technique
so that there is reduction in unemployment.
For whom to produce?
Finally, the purposeful distribution of final goods and services
produced (national income) has to be done; that is, who gets what
and how much? The economy needs to decide the best suitable
mechanism for distribution of the final products among different
segments of the society. The objective behind selecting such
mechanism is to reduce inequality of income, to reduce poverty
and to add to the social welfare and standard of living of
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