BASIC PROBLEMS OF AN ECONOMY

BASIC PROBLEMS OF AN ECONOMY

As mentioned in the last unit, all countries, without exceptions, face the problem of scarcity. Their resources (natural productive resources, man-made capital goods, consumer goods, money and time etc.) are limited and these resources have alternative uses. For example, coal can be used as a fuel for the production of industrial goods; it can be used for running trains, for domestic cooking purposes and for many other purposes. Similarly, financial resources can be used for many purposes. If the resources were unlimited, people would be able to satisfy all their wants and there would be no economic problem. Alternatively, if a resource has only a single use, then also the economic problem would not arise.

Every economic system, be it capitalist, socialist or mixed, has to deal with this central problem of scarcity of resources relative to the wants for them. This is generally called ‘the central economic problem’. The central economic problem is further divided into four basic economic problems. These are:

•  What to produce?
•  How to produce?
•  For whom to produce?
•  What provisions (if any) are to be made for economic growth?