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Monday, 25 June 2018

Central Problems of an economy

Every economy faces three central problems: 
  1. What to produce
  2. How to produce
  3. Whom to produce

What to produce:

This problem has two aspects I.e what goods are to be produced and in what quantities. Goods are classified for this purpose into consumer goods and capital goods. Consumer goods are the goods which are consumed directly by consumers for satisfaction of their wants. These goods are essential for survival for a human being. Capital goods (example, plant and machinery) are the goods which are used for the production of consumer goods. An economy has to choose the ideal combination of both type of goods to be produced. If ideal ratio is disturbed there would be a problem. If consumer goods are produced more than capital goods from currently available resources , problem in future consumption will arise. People will suffer in future. On other hand if capital goods are produced more then present generation will suffer. Enough consumption goods would not be available. Hence  according to available resources , economy has to choose ideally so that present and future generation would not suffer.

How to produce:

This problem is associated with the technique of production I.e labour intensive and capital intensive. If labour is used more than 50℅ , it is called labour intensive. Using labour intensive method, more opportunities of employment will be available but production will be slow. When more than 50℅ capital is used , production will be fast but it will not help to cope with unemployment. Social welfare will not be achieved. Problem of choice arises because both social welfare and GDP growth is essential. Hence strategy for production should be prepared in a manner so that both objective can be achieved.

Whom to proble:

This problem is associated with the choice between social welfare and country's welfare. If goods are to be produced for weaker section of society, social welfare will be achieved but GDP rate will be reduced due to investment at decreasing rate by producers.

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