Central Problems of an Economy topic of CS Foundation
Central problems of an Economy
Production, distribution and disposition of goods and services are the basic economic activities of life. In the course of these activities, every society has to face scarcity of resources. Because of limited resources/scarcity of resources and infinite demands, society needs to determine how to produce and distribute these relatively scarce resources.
- What to produce?
Land, labour, capital, machines, tools, equipment’s and natural means are limited. Every demand of every individual in the economy cannot be satisfied, so the society has to decide what commodities are to be produced and to what extent.
There are 2 possible aspects of this central problem:
(i) What possible commodities to produce: An economy has to decide, which consumer/general goods (rice, wheat, clothes, etc.) and which of the capital goods (machinery, equipment’s, etc.) are to be produced. In the same way, economy has to make a choice between civil goods (bread, butter, etc.) and defence goods (guns, tanks, etc.).
(ii) How much to produce: After deciding the goods to be produced, economy has to decide the quantity of each commodity that is selected. It means, if involves a decision regarding the quantity to be produced, of consumer or capital goods and civil or defence goods.
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- How to produce?
A good can be produced using different techniques of production. By ‘technique’, we mean which particular combination of inputs to be used. Goods can be produced in large-scale industries or in small-scale village and cottage industries. The economy has to decide between automatic machines and handicrafts.
Selection of the technique – choice between labour-intensive (LIT) and capital-intensive techniques (CIT)
(i.) In Labour intensive technique, more labour and less capital (in the form of machines, etc.) is used.
(ii.) In Capital intensive technique, there is more capital and less labour utilization.
Availability of factors and their relative prices helps in determining the technique to be used. The selection of technique is made with a view to achieve the objective of raising the standard of living of people and to provide employment to everyone. In India, LIT is preferred due to abundance of labour, whereas, country like U.S.A., CIT is preferred due to shortage of labour, and abundance of capital.
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III. For whom to produce?
Goods and services produced in the economy are consumed by its citizens. The individuals may belong to economically weaker sectioned or rich class of people. Actually this is the problem of distribution. Therefore, what goods should be consumed and by whom depends on distribution of National product.
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