what is Economic problems ?|What are the causes of Economic Problems ?
what is Economic problems ?
The Economic problem is the problem of selecting limited resources with alternative uses to satisfy unlimited needs.
What are the causes of Economic Problems ?
i) Unlimited needs
ii) Limited resources
iii) Alternative use
Unlimited needs
Man's needs are unlimited.humans being can satisfy all his needs completely.These goods are said to be scarce because their demand exceeds their supply,regardless of their cost.
Limited resources
Most of the goods and services that satisfy humans needs are limited.These goods are said to be scarce because their demand exceeds their supply,regardless of their cost.
Alternative use
Another reason for the economic problem is the alternative use of limited resources.For Example,milk is used for various purposes
Central problems of an Economy
Every economy ,rich or poor,developed or underdeveloped,has to deal with three central problems.
i) What to produces ?
ii) How to produces ?
iii) For Whom to Produces ?
What to produces ?
there are two sides to this problem;
i) what to Produces
ii) what quantity to be produces
The first problem of every economy is which goods and services should be produces so that goods and services should
i) An economy has to decide what goods and services to produce. For example, which consumer goods such as sugar, cloth, wheat, ghee etc. should be produced and which capital goods such as machinery etc. should be produced. Like - Guns, cannons should be produced and which peacetime items like - bread, butter should be produced .
ii) When an economy decides what goods and services to produce, it has to decide how much of those goods to produce. It also has to decide how much consumer goods to produce and how much capital goods to produce.
How to produce?
Another major problem of an economy is how to produce goods and how to arrange production.
Example: Production of cloth can be done with the help of handlooms or it can be done by modern machines. Because two techniques are available in every society.
i) Labor intensive techniques
ii) Capital intensive technology
Therefore, the problem arises as to which techniques should be used in the country in what quantity.
For whom to produce?
• Due to limited resources no economy can produce desired quantity of goods for all sections of the society.
• Because there are two classes of society in every economy:
i) Rich
ii) Poor
• Social justice is promoted if production is done for the poor. Or equality is promoted.
• If there will be a reduction in the profits of the producers if they produce for the poor.
• Low profit means low investment which means the growth of GDP will be low.
• Due to this the economy will remain backward for a long time to come.
• So here the problem arises as to which class to produce and in what quantity.
Solution of Central Problems in different Economies
• Different solve the central problems of the economy in different ways.
i) market economy
ii) Centrally planned economy
iii) Mixed economy
market economy
Market economy is a free economy. It means that here the producers have the freedom to decide what, how and for whom to produce. They take this decision on the basis of these decisions are taken on the basis of market supply and demand forces.
centrally planned economy
In a centrally planned economy, the decisions regarding 'what, how and for whom' to produce are taken by a central authority appointed by the country's government.
• All those decisions are taken keeping in view the objective of achieving maximum social welfare.
• The main objective of this type of economy is not to maximize profits. Such goods and services are produced which in the opinion of the central authority are most beneficial to the society.
mixed economy
• A mixed economy includes features of both a free economy and a centrally planned economy.
• Decisions regarding what, how and for whom to produce in the economy are taken on the basis of both market forces and social welfare.
production possibility curve
(Production Possibility Curve (PPC)
A production possibility curve is a curve that shows the alternative possibilities of producing two goods with the given resources and technology.
Assumptions of Production Possibility Curve
i) resources are given
ii) There is full and efficient use of the given resources
iii) Production technology remains constant.
Table : Production Possibility Schedule
picture interpretation