Question

central problem of all economy

Answer 1

The problem of allocation of resources is studied under 3 heads:
(1) What to produce;
(2) How to produce;
(3) For whom to produce.

1. What to Produce:

This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity. Every economy has limited resources and thus, cannot produce all the goods. More of one good or service usually means less of others.

For example, production of more sugar is possible only by reducing the production of other goods. Production of more war goods is possible only by reducing the production of civil goods. So, on the basis of the importance of various goods, an economy has to decide which goods should be produced and in what quantities. This is a problem of allocation of resources among different goods.

The problem of ‘What to produce’ has two aspects:

(i) What possible commodities to produce: An economy has to decide, which consumer 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 war 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 and capital goods, civil and war goods and so on.
Guiding Principle of ‘What to Produce’: Allocate the resources in a manner which 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 using different techniques of production. By ‘technique’, we mean which particular combination of inputs to be used. Generally, techniques are classified as: Labour intensive techniques (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.
For example, textiles can be produced either with a lot of labour and a little capital or with less labour and more capital. 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. For example, in India, LIT is preferred due to abundance of labour, whereas, countries like U.S.A., England, etc. prefer CIT due to shortage of labour and abundance of capital.
Guiding Principle of ‘How to Produce’: Combine factors of production in such a manner so that maximum output is produced at minimum cost, using least possible scarce resources.

3. For Whom to Produce:

This problem refers to selection of the category of people who will ultimately consume the goods, i.e. whether to produce goods for more poor and less rich or more rich and less poor. Since resources are scarce in every economy, no society can satisfy all the wants of its people. Thus, a problem of choice arises.
Goods are produced for those people who have the paying capacity. The capacity of people to pay for goods depends upon their level of income. It means, this problem is concerned with distribution of income among the factors of production (land, labour, capital and enterprise), who contribute in the production process.


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