CENTRAL PROBLEMS OF AN ECONOMY

       CENTRAL PROBLEMS OF AN ECONOMY

In any Economy there are three central problems (or basic problem) of an economy , namely :- Production,Distribution and Disposal of the goods and services produced in any economy. Now a days every society ( Developed or Underdeveloped)  is  facing the problem of scarcity of resources. 

                                                     There is a term PPC , stands for Production possibility curve  which represents various combination of two goods which  an economy produces with given technique and resources. this term is used to describe all the problems of an economy graphically. 

 We can understand the  problems with the help of  this chart

In this figure there are  three types of problems but these are now a days not recognised because the economy now focuses on resource allocation mainly so the main problems are studied under allocation of resources that are explained in the chart below :- 

Let us explain the problem from higher level.

1. Allocation of resources

Allocation of resources refers to the problem of assigning the scarce resources in such  a manner so that maximum wants of the society are fulfilled . As resources are limited in relation to the unlimited wants , as it is important to economise their uses and utilise them in most efficient manner.
  

                                2. Fuller utilisation of resources

  Fuller utilisation of resources refers to the process to utilise the resources in the best way it can be. Fuller utilisation of resources  are necessary  to satisfy  human wants with limited resources in long run.

                                    3. Growth  of resources

Growth of resources  is defined as an increase in the output that an economy produces over  a  period of time , the minimum   being consecutive  quaters . In other words ,  Growth  is an increase in what is scarce  resources.

      

                         Further as explained above the main  problems of an economy are 1. WHAT TO PRODUCE

                          2. HOW TO PRODUCE 

                          3. WHOM TO PRODUCE       

 WHAT TO PRODUCE 

The problem of what to produce  includes selection of goods and services to be  produced and quantity to be produced  of each selected commodity . Selection of commodity depends upon the needs and level of development  of an economy.

GRAPHICAL REPRESENTATION In this figure , the curve represents the combination of  luxarious goods and essential goods , Country A shows the dependency  on essential goods  means the country is underdeveloped ,  now the country E  which shows the dependency of on luxarious goods  which country E is developed and  lives a  high quality life standard  , where as point B,C, D  shows  the countries  using  combination of both essential and luxarious goods .

IT HAS  TWO ASPECTS 

1. What possible commodity to produce 

> An economy has to decide which consumer good (rice,wheat,e.t.c.) and which capital goods (machinery,equipments,e.t.c.) are to be produced .

2. How much to produce

>After deciding the goods to be produced , economy has to decide  the quality of each commodity  that is selected to produce .

       HOW TO PRODUCE 

This problem refers to selection of techniques to be used  fo production of goods and services . A good can be produced by different  techniques of production . But it directly depends on the producer that which way is  cheaper as well as efficient for the production of commodity . Production of commodity should bein the best way so that the resources can be fully utilised and help in the increase in production . By techniques we mean particular combination of input and technology 

There are two types of techniques :

1. Labour Intensive Technique

2. Capital Intensive Technique

 These are the two techniques generally used in production.

1. Labour Intensive Technique

>Labour intensive technique is the technique of production in which  more labours are used in composition with less capital . This technique of production is generally found in those countries where  labour cost is cheaper than capital cost .

2.Capital Intensive Technique

> Capital Intensive Technique is the  technique of production in which more capital is used with less composition of labour .In  simple words low population area. This is generally  found in those countries where capital cost is cheaper than labour cost 

 GRAPHICAL REPRESENTATION 

In this figure , the curve shows the capacity of different  countries  to afford different combination of labour and capital . Here country A shows wholly dependent on Labour intensive technique  which means it is highly populated country ( abundance of labour) .vice-versa in country E.  where country E is developed or less populated area .  Other countries like B,C,D, have some combination of capital and labour intensive techniques . 

   FOR WHOM TO PRODUCE 

 For whom to produce refers to the selection of category of people who will ultimately consume the good ,i.e whether to produce  goods for more poorers  and less richers or more richers and less poorers . since resources are scarce in the economy , no society can satisfy all the wants  of its citizen . Thus , a problem of choice arises .

         Goods produced for those people who have the paying capacity .The capacity of people  to pay  for goods depends upon their level of income . It means this problem is concerned  with the distribution of income  among the factors of production , who can contribute to the production process 

This problem is categorised under two main heads :

1. Personal Distribution 

It means how national income of an economy is distributed among different group of people . It depends on government . This distribution deals between richer class and  poor class. 

2. Functional distribution 

It involves deciding the share of different  factors of production in total national production of the countries . It is a distribution among factors of production .

GRAPHICAL REPRESENTATION

In this figure , the curve indicates the thinking of government to distribute the national income . Point A shows Country A    who distributes its national income on functional basis only . Point E shows the vice versa condition of countryA . where as countries B,C,D, uses both the distribution to satisfy the need of people .