Three Fundamental Questions Of Economics

Central Problems of an Economy

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From the study of the essential processes of an economy, information technology would appear that some fundamental problems arise whatever the type of the economy.

An economic system exists considering of two bones facts: Firstly human wants for goods and services are unlimited; and secondly, productive resource with which to produce goods and services are scarce.

Wants being unlimited and our resources being limited, we cannot satisfy all out wants. That beingness so, an economy has to determine how to use its scarce resource to give the maximum possible satisfaction to the members of the guild.

In doing and so, an economy has to solve some basic problems called Central Problems of an economy, which are:

(i) WHAT to Produce.

(ii) HOW to Produce.

(iii) FOR WHOM to Produce.

Any the blazon of the economic system or economic system, these problems have to be solved somehow. Whether information technology is a backer economic system of the The statesA. or a socialist economy of the U.S.South.R. or a mixed economy of Bharat, every economy has to make decisions in regard to what, how and for whom to produce. These issues are basic and fundamental for all economies.

However, different economies may solve these problems differently. For instance, the socialist economy of Soviet Russian federation tackles these problems in a unlike way from that of capitalist America. We shall now explicate each of the above 3 problems in some detail.

(i) WHAT to Produce:

The problem 'what to produce' tin can be divided into two related questions. First, which goods are to be produced and which not; and 2nd, in what quantities those appurtenances, which the economy has decided to produce, are to be produced. If productive resource were unlimited nosotros could produce as many numbers of goods every bit nosotros liked and, therefore, the question "What goods to be produced and what not" would not have arisen. Only considering resources are in fact scarce relative to human wants, an economic system must choose amid dissimilar culling collections of goods and services that it should produce.

If the Lodge decides to produce particular appurtenances in a larger quantity, it will have to withdraw resources from the product of some other appurtenances. Farther, an economic system has to decide how much resource should exist allocated for the production of consumer goods and how much for capital letter appurtenances. In other words, an economic system has to decide the respective quantities of consumer goods and uppercase goods to be produced.

The choice between consumer appurtenances and capital goods involves the choice betwixt the nowadays and the future. If the social club decides to produce more capital goods, some resource will take to be taken away from the production of consumer goods and. therefore, the production of consumer goods would have to be cut down. Merely greater amount of capital appurtenances would brand possible the production of larger quantities of consumer appurtenances in the hereafter. Thus, we see that some current consumption has to exist sacrificed for the sake of more consumption in the future.

(ii) HOW to Produce:

The problem of 'how to produce' ways which combination of resources is to be used for the production-of goods and which engineering science is to be fabricated use of in product. Once the society has decided what goods and services are to exist produced and in what quantities, information technology must then make up one's mind how these goods shall be produced. There are diverse alternative methods of producing a proficient and the economy has to choose among them.

For case, fabric tin can be produced either with automated looms or with power looms or with handlooms. Fields can be irrigated (and hence wheat can be produced) by edifice small irrigation works similar tube-wells and tanks or by edifice large canals and dams. Therefore, the economic system has to make up one's mind whether textile is to be produced past handlooms or power looms or automatic looms. Similarly, it has to decide if the irrigation has to be done by pocket-sized irrigation works or past major works. Obviously, it is a trouble of the choice of production techniques.

Dissimilar methods or techniques of production would apply unlike quantities of various resources. For instance, the production of cloth with handloom would brand use of more labbur and less capital. Production by handloom is, therefore, called labour-intensive technique of production. Production of material with power loom or automatic loom would utilise less labour and more capital. Production with power looms is, therefore, chosen capital-intensive technique of producing cloth. Thus, the economy has to choose whether it wants to use for production labour-intensive methods or capital-intensive methods of production.

Obviously, the choice betwixt different methods would depend on the factor-supply situation and the prices of the factors of production. The criterion, it is obvious, must exist the cost of production- It is well known that the resources are scarce. But some resources are more than scarce than others. It is in guild'southward interest that those methods of production are employed that make the greatest use of the relatively plentiful resource or, conversely, economies are much as possible on the relatively deficient resources.

(three) For Whom to Produce:

In one case the bug of 'what' and 'how' to produce are solved, the appurtenances are then produced. Considering the resource and the resulting output of goods are limited, the third basic economic decision, which must be taken, is 'for whom to produce'. 'For whom to produce' ways how the national product is to be distributed among the members of the society. In other words, for whom to produce means that should get how much of the total corporeality of goods and services produced in the economic system.

Thus, the third trouble is the problem of sharing of the national production. Distribution of the national product depends on the distribution of national income. Those people who accept larger incomes would have larger capacity to "purchase appurtenances and hence will get greater share of appurtenances and services.

Those, who take low incomes, would have less purchasing power to buy things. The more than equal is the distribution of income, the more equal volition be the distribution of the national product. Just the question now arises: how is the national income to be distributed, that is, how is information technology to exist determined as to who should go how much of the national income?

Should the people get equal incomes and hence equal shares from the national product, or whether the distribution of national income should be done on the basis of the Marxian principle 'from each according to his ability, to each according to his needs', or should the distribution of national income be in accordance with the contribution fabricated to the total production, that is, should everybody get income exactly equal to what he produces?

The main difficulty in the question of distribution of national product or income is how to reconcile the disinterestedness and justice aspect of distribution with the incentive aspect. From the point of view of equity, distribution of national product or income on the basis of equality seems to be the best.

But the trouble is that equality in the distribution of national production or income may adversely affect the incentive to produce more. If this incentive is destroyed or greatly diminished as a result of promoting equality, the total national output available for sharing may be so much smaller that the living standards of all may become, down.

Problems of Efficiency and Growth:

Besides the three cardinal bug explained above, there are two other issues of an economy to which economists of today attach considerable importance. They are the bug of efficiency and growth of the economic system. Now a word about each of them.

Efficiency of Resources-use:

A very important question that tin can be asked about the working of an economy is: Are the resources existence used efficiently? Since resources are scarce, it is patently desirable that they should be nearly efficiently used, i.e., the production and distribution of the national product should be efficient. Production is said to be efficient, if it is non possible to produce more of one practiced without reducing the output of any other goods in the economy. Similarly the distribution is efficient if it is not possible to make any ane person/persons better off without making any other person/persons worse off through whatsoever redistribution.

Growth of Productive Capacity:

It is likewise important to know whether the productive chapters, of an economy is increasing, static or declining. The increase in productive capacity of an economy over time is called economic growth. Obviously, for under-developed economies, their basic problem is how to accelerate the pace of their economic growth.

Fifty-fifty developed countries would not similar to rest on their oars. In fact, it has been observed that they are able to accomplish higher annual rate of growth than the under-developed ones. The trouble of growth is thus non peculiar to the under-developed countries, but is of importance to all countries, whether developed or undeveloped, whether complimentary-market or centrally planned.

Solution of the Fundamental Economic Problems in a Capitalist Economy:

It is the toll mechanism that helps in the solution of the central problems of the economy. Cost mechanism ways a set of equilibrium price of individual commodities and factors of product determined through the forces of demand and supply in the various markets.

The main issues, are what to produce, how to produce and for whom to produce. In all these cases, toll is the indicator of the direction of profitable investment. Those commodities will be produced for which demand prices are loftier and are therefore profitable to produce; those techniques or factors of production will be employed which cost less as indicated by the prices of factors and the bolt will exist produced for those sections of the people who have adept incomes and are in a position to pay their price.

Hence, in a free capitalist economy, it is the price machinery which solves the central problems of the economy. Price-mechanism establishes an equilibrium cost 'both in the article market and in the factor market. Equilibrium prices in the commodity markets and fact markets are determined through the forces of demand and supply in the various markets.