Lesson 6: Central Problems of Economies
Lesson objective
Dear learner,
At the end of this lesson, you will be able to:
- Describe the basic economic problems.
- Explain how the basic economic problems affect individuals, firms, and society
Brainstorming Question
What are the basic or central problems of economics?
Key Terms and Concepts
- Basic Economic Problems
- What is to be produced?
- How to produce?
- For whom to be produced?
- techniques of production
Basic economic problems are those problems that an economic system faces due to the scarcity of resources.
This question is also called the problem of the allocation of resources. It implies that every economy must decide on the type and quantity of goods to be produced.
This question is also referred to as the problem of choice of technique.
This problem is also called the problem of the distribution of the national product of a country.
The various techniques of production can be classified into two groups: labor-intensive techniques and capital-intensive techniques. A labor-intensive technique involves using more labor relative to capital per unit of output, emphasizing human effort and skills in the production process. In contrast, a capital-intensive technique involves using more capital relative to labor per unit of output, focusing on machinery, technology, and automation to achieve production efficiency.
Dear learner, in the previous lesson, we learned about basic economic problems such as scarcity, choice, and opportunity cost with the help of the PPF. In this lesson, we will learn about central economic problems or questions, so please read the notes with attention and do the quizzes.
Basic Economic Problems
Basic economic problems are those challenges that arise due to the scarcity of resources, which every economic system faces. These problems are universal across all types of economies and are often referred to as the central problems of the economy. Modern societies encounter three fundamental economic problems, namely,
- What goods and services are to be produced?
- How to produce goods and services?
- For whom are goods and services to be produced?
1. What Goods and Services are to be Produced?
This question, also known as the problem of the allocation of resources, involves deciding the type and quantity of goods and services that should be produced in an economy. Since resources are limited, choices must be made regarding what to produce. The economy must prioritize among various categories such as:
- Consumption Goods vs. Capital Goods: Whether to produce goods for immediate consumption or goods that will aid in further production.
- Civil Goods vs. Military Goods: Whether to allocate resources to produce goods for civilian use or for defense and military purposes.
- Necessities vs. Luxuries: Whether to focus on producing essential goods and services or luxury items.
2. How to produce goods and services?
This question is referred to as the problem of the choice of technique. Once the economy has decided on what goods and services to produce and in what quantities, the next step is to determine how to produce them. This involves selecting the most efficient production methods or techniques.
There are two main types of production techniques:
- Labour-Intensive Techniques: These techniques rely heavily on human labour relative to capital. They are often used in situations where labour is abundant and inexpensive.
- Capital-Intensive Techniques: These techniques use more capital (machinery, technology) relative to human labour. They are typically employed when capital is readily available and labour is expensive or scarce.
The choice between these techniques depends on the availability and cost of various production factors. Making an optimal choice is crucial for utilizing limited resources effectively to maximize output.
3. For Whom are Goods and Services to be Produced?
This question, also known as the problem of the distribution of national products, addresses how the produced goods and services are distributed among the members of society. It involves deciding who will benefit from the produced goods and services.
An economy must determine whether to:
- Produce for the Wealthy: Focus on producing goods that cater to the needs and wants of the rich.
- Produce for the General Population: Focus on producing necessary goods that benefit the majority, particularly the poorer sections of society.
In an economy aiming to maximize the welfare of its population, the emphasis would likely be on producing essential goods for everyone before producing luxury items for the affluent.