Central Problems of an Economy

Date : 11.05.2020 
Sub  : Economics
Day  : 1
Time : 8:20am - 9am 
Period : 2 
Class    : 11

Learning Objectives

• Students come to know that the problem of an economy is Scarcity
• What are the Central Problems of an economy.
• Its Guiding Principles

A very good morning students.

Hope you are understanding Micro Economics

Yesterday We had learnt the difference between Micro and Macro Economics and Positive and Normative Economics

Today we will be learning two topics :

• Central Problems of an Economy
• Production Possibility curve( in the 7th period0

Both topics are very important .Please make sure you understand them well

CENTRAL PROBLEMS OF AN ECONOMY

In the economic activities of an economy , every society has to face scarcity of resources.Because of this Scarcity , every society has to decide how to allocate ( distribute ) the scarce resources.This leads to following Central Problems, that are faced by every economy.

Central Problems, that are faced by every economy are:

• What to Produce
• How to Produce
• For whom to Produce

These problems are called central problems because these are the most basic problems of an economyand all other problems revolve around them.

THE 3 PROBLEMS ARE STUDIED UNDER THE PROBLEM OF "ALLOCATION OF RESOURCES"

Allocation of Resources : It refers to the problem of assigning the scarce resources in such a manner so that the maximum wants of the society are fulfilled.

The problem of allocation of resources is studied under the following heads:

1. WHAT TO PRODUCE: This problem involves selection of goods and services to be produced and the quantity to be produced of each selected item.

The economy has to decide whether it has to produce more War goods or more Civilian goods, more consumer goods or more producer goods.

The economy can produce more war goods only if they produce less of Civilian goods.

It is also important to know that what quantity or amount of the good is to be produced.

Since the problem has two aspects , it is also termed as "WHAT TO PRODUCEAND IN WHAT QUANTITY"

Guiding Principle: Allocate the esources in such a manner that gives maximum aggregate satisfaction.

2. HOW TO PRODUCE: This problem refers to selection of technique to be used for production of goods and services.

A good can be produced by two techniques:

• Labour Intensive Technique: In this technique , more labour and less capital(machines) is used.
• Capital Intensive Technique: There is more capital ( machines) and less of labour is used.

For example in country like India the economy would use Labour Intensive Technique because it has surplus of labour available.

 Guiding Principle : Use such a technique where maximum output is produced at minimum cost, using least possible scarce resources.

3. FOR WHOM TO PRODUCE : This problem relates to the  distribution of produced goods and services among the individuals within the economy, i.e. selection of the category of people who will ultimately consume the goods, meaning whether the to produce goods more for poor and less rich or more rich and less poor.

To explain it in simple terms it means that goods are produced in terms of the paying capacity of an individual.

How can a person pay for a good depends on his level of Income. It means this problem is concerned with distribution of Income amonf the factors of Production( Land, Labour,Capital and Enterprise)

Guiding Principle is to ensure that urgent wants of each productive factor are fullfilled to the maximum possible extent.

To understand the notes given above please go through the video link given below

https://www.youtube.com/watch?v=DSJYuQhoEHY