Question

What are the three major problems of an economy ??

Answer 1

Answer:

(i) WHAT to Produce.

The problem ‘what to produce’ can be divided into two related questions. First, which goods are to be produced and which not; and second, in what quantities those goods, which the economy has decided to produce, are to be produced. If productive resources were unlimited we could produce as many numbers of goods as we liked and, therefore, the question “What goods to be produced and what not” would not have arisen. But because resources are in fact scarce relative to human wants, an economy must choose among different alternative collections of goods and services that it should produce.

(ii) HOW to Produce.

The problem of ‘how to produce’ means which combination of resources is to be used for the production-of goods and which technology is to be made use of in production. Once the society has decided what goods and services are to be produced and in what quantities, it must then decide how these goods shall be produced. There are various alternative methods of producing a good and the economy has to choose among them.

(iii) FOR WHOM to Produce.

Once the problems of ‘what’ and ‘how’ to produce are solved, the goods are then produced. Because the resources and the resulting output of goods are limited, the third basic economic decision, which must be taken, is ‘for whom to produce’. ‘For whom to produce’ means how the national product is to be distributed among the members of the society. In other words, for whom to produce means that should get how much of the total amount of goods and services produced in the economy.

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Answer 2

Three Major Problems of an Economy

1. What to Produce ?

This problem is related to two questions:

i. What goods and services to produce?

ii. In what quantity should these goods and services should be produced ?

For example, a business man Mr. A should produce pens for sale in the market or should he produce machines that will be capable of producing pens and sell them to other manufacturers. And, in what quantity, 100 units or 1000 units of pens should be produced.

2. How to Produce ?

This problem is about the technique of production; whether a person should adopt

i. Labor Intensive Technique (LIT) or

ii. Capital Intensive Technique (CIT)

In LIT technique, more persons are employed as compared to machines. This is more prominent in countries like India and China, where there is no shortage of human resources.

However, in CIT, a lot of capital is required to purchase machinery for production since the human resources are scarce and expensive. This is more prominent in countries like America where the population is lower than India and China.

3. For Whom to Produce ?

This problem is related to the audience at which the products will be targeted at. For example, whether to produce goods for the poor or for the rich ?

Consider this example. Mr. A has a business of manufacturing pens and selling them. He can produce two varieties - One pen costing Rs. 5 and another stylish pen costing Rs. 200.

Let's say this was the production cost and he sells them for a profit of Rs. 5.

So, which variety of pens should he sell?

The Rs. 5 + 5 = Rs. 10 pen for the poor or The Rs. 200 + 5 = Rs. 205 pen for the rich ?