#economics

Discuss the central problems in an economy 

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CENTRAL ECONOMIC PROBLEMS

i) Allocation of resources

a)What to produce and of what quality :-consumer goods or capital goods, war time goods or peace time goods

b)How to produce:- technology –capital intensive or labour intensive

c)For whom to produce:- functional distribution or personal distribution

ii). Efficient Utilization of resources-no wastage- no over utilization nor underutilization. Economic efficiency

refers to efficiency in production and efficiency in distribution.

iii.) Growth of resources:-It refers to increase in productivity of resources through improvement in technology.

(Allocation = the act of sharing something/ an amount of resources allowed or assigned for something)

SCARCITY OF RESOURCES: Scarcity of resources means shortage of resources in relation to their demand.

OPPORTUNITY COST: It is the cost of next best alternative foregone.

The central problem of “what to produce” refers to which goods and services will be produced in an

economy and in what quantities. An economy has to produce those goods and services where there will

be maximum social utility. This problem is studies under price theory.

The central problem of “how to produce” refers to what technique of production (i.e.., labour intensive or

capital intensive) should be used to produce goods. An economy has to select that technique which

maximizes the output at minimum cost. This problem is studies under theory of production.

The central problem “for whom to produce” is related to distribution of produced goods and

services(i.e.., income and wealth) among factors of production in the form of rent, wages, interest and

profit.This is explained under the theory of distribution.