Central Problems of an Economy

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Resources are limited so they are insufficient to satisfy the unlimited wants and needs of all human beings. So every economy has to face the scarcity of resources which give rise to the problems of choice. Every economy has to decide on the problem of optimum utilization of its scarce resources.

Some of the problems faced by an economy are:

Central Problems Of An Economy, What To Produce, How To Produce, For Whom To Produce

  • What should be produced and in what quantity?
Every economy must decide on each of the possible products and services it will produce, focusing on its efficiency. Whether to produce more agricultural goods or to produce more industrial goods, whether to produce more consumer goods (like clothing, housing) or capital goods (like furniture,buildings, machinery, equipment) , whether to produce more luxury goods (like jewelries, designer watches) or to produce more primary goods (like fruits, vegetables, seafood, cooking oil etc).

Types of Natural Resources like Water, Wind, Forest, Soils, Animals

  • How to produce these goods and services?
Every economy must decide on how much of which of the resources to use in the production of each and every goods and service, also focusing on efficiency. It basically includes two components i.e capital and labor.

Capital intensive production requires machinery, technology, and equipment to produce goods so it requires a larger financial investment.

Labor intensive production requires more manpower to produce goods and services than capital.

It totally depends on an economy to decide to which method to use and in which sector for optimum utilization of resources.

  • For whom to produce?
Every economy must decide on the distribution of goods that have been produced like who gets how much of the goods, whether or not to ensure a minimum consumption amount for everyone in the economy, focusing on efficiency and equal life chances. It is basically decided by different factors by the nature of the economy i.e capital economy, social economy or mixed economy.

Thus the allocation of scarce resources and distribution of final goods and services are the basic problems of an economy.

Hope this article helps you understand the Central problems of an Economy.