CENTRAL PROBLEMS

OF AN ECONOMY
 CENTRAL PROBLEMS OF
ECONOMY/PROBLEM OF ALLOCATION OF
RESOURCES

• The problem in economics is scarcity and

choice.Based on this fundamental problem
there are three basic or central problem in
economics. The three basic problems are
1.What to produce.
2.How to produce.
3.For whom to produce.
 What to produce
• What to produce means what commodities are to be
produced and in what quantity they are to be produced.
• Since resources are scarce commodities cannot be
produced in any quantity.So the country has to make a
choice regarding the quantity to be produced.
• Mainly due to ;
• a)scarcity of resources do not permit production
of all goods that people want
• b)Goods yield different utilitie s in different
economies.
• F or e g : P r i o r i t i e s i n d e v e l o p e d c o u n t r ie s a n d
developing countries are different
 How to produce
• How to produce means what method of
production is to be used, ie, it relates to the
problem of choice of technology,whether
labour intensive or capital intensive.
• If the country is labour rich and capital scare,
labour intensive method is more appropriate
than capital intensive method.
 For whom to produce
• Deals with the problem of matching the
p roduct ion p at te rn wit h t h e de ma nd
pattern.
• Deals with the distribution of resources
among the members of the society, ie,
how the nation income is distributed
among the people.
 Solving these problems

• Different economies solve in different

ways:

Free capitalist economy : Price mechanism.

Socialist economy : Central planning authorities

Mixed economy : combine market economic system and

planning
Thank You