Discuss the central problems of an economy?
Answers
whom to produce
when to produce
who to produce
There are 3 central problems of an economy.
- What to produce?
- How to produce?
- For whom to produce?
1. What to Produce?
This again involves two issues, the first one being what kinds of goods to produce and how much.
What needs to be answered first is what kind of goods will bring out maximum satisfaction and fulfil the needs of the people. This issue arises due to the fact that means are scarce in relation to our wants.
The economy has to decide which of the consumer goods [sugar, clothes, ghee, etc] will need to be produced and which of the capital goods [machinery, equipment, etc].
Once it's decided both, they'll have to decide on the quantity of goods to be produced.
2. How to Produce?
There are two possible methods of production.
- Labour Intensive - more of labour than capital.
- Capital Intensive - more of capital than labour.
The economy will have to decide which technique will provide efficient production.
3. For Whom to Produce?
Every economy has two sections of society, namely the rich and the poor.
If more goods are produced for the poor, it would lead to social justice and less of inequality. But this would also lead to lower profits and a lower Gross Domestic Product.
The economy will have to choose between equality and growth of GDP.