ECONOMY AND ITS CENTRAL PROBLEMS

 

  Learning Contents:                                                            

·           Understanding Economy

·          Economic Problems and its causes.

·         Central Problems or Economic Problems of an Economy

Economy

An economy is a system that provides living to the people. For this objective to be fulfilled it is necessary that every economy should undertake certain economic activities. These economic activities are known as essentials or vital processes of an economy. In other words, “Economy is the total of all economic activities that enable people to earn their livelihood”.

Economic Problem

As we have discussed in previous topics the economic problem is a problem of choice. Human wants are unlimited. They are never-ending. They multiply at a very fast rate but the resources to fulfill them are limited. In other words, resources or factors of production (they are defined as goods and services needed to carry out production i.e., land, labor, capital and entrepreneurship) are scarce. They are available in limited quantities in relation to the demand. Resources are not only scarce but they also have alternative uses. All this generates a question of making choice between which goods and services to produce first. The economy consists of individuals, business firms, and societies that must make this choice.

According to Prof. Robbins, “the economic problem is the problem of choice or the problem of economizing, i.e., it is the problem of fuller and efficient utilization of the limited resources to satisfy maximum number of wants.

Causes of Economic Problem

Economic problem arise basically because of the fact that the resources are scarce and have alternative uses and also people have unlimited wants. The economic problem is to match limited resources to unlimited wants and needs. The three main causes of the economic problem are:

1.                Human wants are unlimited:

Human wants are unlimited. When a particular want is satisfied, another want arises after some time.  Wants are satisfied by the consumption of goods and services. However there is no end to them since when some of them are satisfied, new one emerges and the process goes on. It is a never-ending process.

2.               Resources are limited:

The resources or factors of production (land, labor, capital, and entrepreneurship) are required for the production of goods and services are limited. No society has enough resources to fulfill all of its needs. For e.g. India has more Labor but less capital. A similar country like the USA, Canada, etc. has more capital and land but less labour. Scarcity of resources is the main problem that is not only faced at  an individual level but at the level of an economy too which we call as the 'Problem of choice' i.e. what goods to be produced and in what quantities.

3.                Resources have alternative uses:

Resources are not only scarce and also has alternative uses. In other words, we can say that the different ways in which resources can be put to different uses (opportunity cost).  For e.g. Land can either be used to grow crops or build a school. Another example says money can either be used for paying the school fees or paying the electricity bills. Thus, a choice is needed to be made among various alternative uses of resources because a resource can be put to use or for a purpose at a time. So, the problem of making choices among various alternative uses of resources is another major economic problem.

  Economic Problems of an Economy

     An economy without scarcity cannot be found in the real world. Every economy has to survive in situations of scarcity. Every human want cannot be satisfied with the scarce resources so it also calls for the efficient allocation of resources or rational management of resources. The economic problems are mainly of three types:-

             1.What to produce and how much to produce?

             2. How to produce?

            3. For whom to produce? Besides the above three main central problems of an economy,  two    other  problems are also listed below  namely:

            4. The problem of unemployment or under-utilization of resources

            5. The problem of economic growth

     These are also known as Central Problems of an Economy. A brief description of the first three  problems is mentioned below:

             1.   What to Produce and how much to produce?

It is the very first economic problem of every economy. The problem of what to produce is about deciding which goods and services are to be produced. As every economy faces resource scarcity, it cannot produce all types of goods and services that it wants. This calls for making the right choice among different goods and services. Every economy decides whether it will produce consumer goods or capital goods. Consumer goods are essential to promote quality of life. Capital goods are essential to increase production capacity. On the other hand, the problem of how much to produce arises due to the scarcity of resources. Deciding the number of goods or services(quantity) an economy should produce is another important aspect to understand. For example, if the economy decides to produce more consumer goods, it is bound to reduce the production of capital goods. The reason is that resources used to produce consumer goods and capital goods are limited and given.

             2.  How to Produce?

This economic problem suggests which technique of production to be used for the production of goods or services. Since resources are scarce, choosing an inefficient technique of production would lead to unnecessary wastage and high cost, which cannot be applied. Broadly, there are mainly two types of techniques of production:

•  Labor-intensive Technique: In In this technique of production we use more labor and less capital (machines) to produce goods or services.

•  Capital-Intensive Technique: In this technique of production, we use more capital and less labor to produce goods or services. In both techniques of production the resource i.e., labor/capital are limited so a decision of choosing which production technique is to be taken by every producer. A good technique of production is one that would maximize output or minimize cost.

            3.  For whom to Produce?

       This economic problem is about distribution of output (or income) among various sections of the society. Output in form of goods and services produced in the economy are meant for those who have the ability (i.e. capacity) to buy them. Ability or capacity or purchasing power of people depends on their income. More income means more capacity to buy. The total output ultimately flows to the households in the form of income, i.e., their wages, rent, profits or interest. Everyone cannot get sufficient income to satisfy all his wants. This raises the problem of distribution of output among different households in such a way that it must promote equality among different sections of the society 

Multiple Choice Questions:

1. Which of the problem is related to the problem ‘what to produce’?

      a. the choice of technique.

b. distribution of income.

c. the choice of goods and services.

d. market value of goods and services.

2.  Central problem of an economy can be:

       a. What goods to produce and how much to produce

       b. How to produce

       c. For whom to produce

       d. All of the above

3. Theory of distribution studies the problem of:

       a. What goods to produce and how much to produce

       b. How to produce

       c. For whom to produce

       d. All of the above

 4. Which of the following is related to the problem ‘how to produce’?

        a. The choice of product

       b. The choice of technique

       c. Factoral Distribution of Income

       d. All of the above

5. Rational decision making requires that:

        a. One’s choice be arrived at logically and without error.

       b. One’s choice be consistent with one’s goals.

       c. One’s choice never varies.

       d. One makes choices that do not involve trade-offs.

6. Capital intensive technique would get chosen in a

       a. Labour Surplus Economy.

       b. Capital Surplus Economy.

       c. Developed Economy.

       d. Developing Economy.

Answers

1. c   2. d  3. c 4. b 5. b 6. b