ECONOMICS PROBLEMS AND CENTRAL PROBLEMS

                     

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µ Meaning and Causes of Economic Problems

The economic problems are the problem of choice, which arise due to unlimited wants, limited resources and alternative use of resources.

Causes of Economic Problem:

1. Unlimited Wants: Human wants are unlimited and these wants changes day by day. No one can fulfil all the wants. If one want is satisfied, A new want will arise.

2. Limited Resources: Resources are scarce, it means the supply of resources is less than their demand.

3. Alternative Use: One resource can be used to fulfil differently want, so the problem of choice will arise that which want should be fulfilled first.

Features of the resources:

1.    Scarcity

2.    Alternative uses

 

µ Central Problems

Basic economics problems of an economy are called Central Problem.

Types of Central Problems

1.    What to produce?

This central problem is the first central problems of allocation of resources related to selection on goods and services. This problem has two aspects.

a.) What goods and services are to be produced?

An economy has to decide whether capital goods (plant, machinery) are to be produced or consumer goods (wheat, rice) are to be produced. Similarly, the economy has to make a choice between Normal goods (sweets, AC) & War goods (bomb).

b) How much quantity of these goods are to be produced?

After deciding what goods are to be produced, and economy has to decide how much quantities of these goods are to be produced because resources are limited, more consumer goods mean less of capital goods. For example, if the economy produces more machines, resources become limited to produce wheat.

2.    How to produce?

This the central problem is the second central problems of allocation of resources related to the choice of the technique of production. There are two types of techniques: Capital intensive & Labour intensive technique.

a.)  Capital Intensive: Capital-intensive the technique is the technique in which capital is used more than labour. For e.g. – Making clothes by machine.

b.)  Labour Intensive: Labour Intensive technique is the technique in which labour is used more than capital. For e.g. – Making cloth by handloom.

An economy has to decide which techniques are to be used for production because resources are scarce. For e.g. – In India, the availability of labour is more than capital. Therefore, India will prefer labour intensive technique.

3.    For whom to produce?

This the central problem is the third central problems of allocation of resources. This problem is related to the distribution of income among different persons. Production is the combined efforts of factors of production namely land, labour, capital and enterprise.

An economy has to decide how much income should be distributed amongst factor as rent for land, wages for labour, interest for capital and profit for the enterprise. The economy will produce goods for those persons who have the purchasing power to buy goods. Purchasing power depends upon how much income is distributed among different factors. so ultimately this problem is related to the problems of distribution of income.

It has two aspects:

Personal Distribution:  Personal Distribution means the distribution of income among different people.

Functional Distribution: Functional Distribution means the distribution of income among different factors.