Central Problems of an Economy

Human wants are unlimited and the resources to satisfy these wants are scarce. Every individual tries to satisfy more and more of his wants. The scarcity of resources in relation to wants give rise to the problem “how to use limited resources to get maximum satisfaction”. This give rise to problem of choice which means we have to select the best alternative among all. The central problems of an economy is further divided into four following basics problems:

  1. What to produce: Every society has to decide what type of goods to be produced? There are 2 types of goods; consumer goods and capital goods. a)Consumer goods tell whether to produce bread, butter etc. b)Capital goods tells about production of machines etc.
  2. How to produce: Now we have to decide about techniques of production. There are mainly 2 types of techniques of production. Labor intensive technique and capital intensive technique. a) Under labor intensive technique there is more use of labor than capital. b) In capital intensive technique, capital is used more than labor.
  3. For whom to produce: As the society can not satisfy all the wants of all the people so we have to decide about for whom to produce. This problem has 2 aspects; personal distribution and functional distribution. a) Personal distribution: here we have to make a choice between whether to produce for rich persons or for poor persons. This is concerned with the problem of inequality. b)Functional distribution: It means how the out be distributed among different factors of production. It is not concerned with inequality.
  4. What provisions should be made for economic growth: For this purpose it is necessary for a society to decide about how much saving and investment should be made for future progress.

Above are the 4 central problems of economy.

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