Central Problems of an Economy

THE CENTRAL PROBLEMS OF AN ECONOMY

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An economy has a number of problems which are a cause of concern for the growth and development of the economy. These problems that the economy faces are normally referred to as central problems of an economy. The central problems remain the main cause of concern in any economy. 

Economic problems: Explanation

Economic problem is considered as the problem which is associated with the usage of limited resources of the economy while producing the various available options in the economy. This basic problem of the economy is derived from the underlying problem of scarce resources and unlimited wants.

Basic problem of an economy

a) Wants are unlimited in nature as the needs and requirements of people are almost never satisfied. Wants also have the characteristic multiplying as time progress.

b) Human beings may have unlimited wants but the resources that the people have to fulfill these needs are very small and limited. The limited means and unlimited wants make it necessary for people to choose and select between the various products and services.

c) Since the people have unlimited wants and have access only to limited means they have to finally choose those options that have alternative uses.

THE CENTRAL PROBLEMS OF THE ECONOMY – EXPLAINED

The three main central problems of an economy are provided below:
1.    What to produce?
2.    How to produce?
3.    For whom to produce?

WHAT TO PRODUCE?

The first central problem of an economy is to decide the products and services to be produced. This is important as the economy cannot produce all the goods and services it might wish to produce, therefore, shall have to select the best alternative among them. So, this central problem becomes very important for the country. The economy decides what goods to be produced either through market forces in capitalistic economy or through government mechanism in socialistic economy or through a mix of both in a mixed economy.

HOW TO PRODUCE?

The economy after having selected what to produce has to decide what are the means through which it shall produce the goods and services in an economy. A developed country which is rich is capital and other resources normally produce through capital-intensive technologies (i.e. using more machines than labour) whereas, an underdeveloped economy uses labour-intensive technologies where labour is cheaper than capital and technology.

FOR WHOM TO PRODUCE?

The third central problem of the economy is the issue of deciding the consumer for whom to produce. In a capitalistic economy this is easily decided by the market forces where market selects its consumers on the basis of the spending power of the consumer. Which means that in such markets economy produces goods and services for those who have the income to afford. In socialistic economy, however, it is the government that decides for whom the government should produce its goods and services.

CENTRAL PROBLEMS IN THE INDIAN CONTEXT

The Indian economy being a mixed economy i.e. the presence of both capitalistic and socialistic economy, the central problems are solved by a mix of both means.

Central Problem	Indian economy’s Central Problem	Example
What to produce?	Indian economy which is a developing economy faces issues to decide the items of production. It has to decide the amount of money to be spent on various goods and services.	The government has to decide whether to produce more defence equipments like guns than agricultural products. So, the government decides what to produce. However, being a mixed economy even the private sector has a role in solving this central problem.
How to produce?	In the Indian context this problems in solved on two counts: a) By government (Public sector) – government normally goes for less capital intensive technology to raise employment. b) By private sector – private companies and firms select less-capital intensive technology as they are more efficient and profitable in long run.	a) Government has started employment generation schemes like MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS) for generating rural employment while building roads. b) But private sector normally selects heavy machinery that saves use of labour to build roads. So, Private normally uses more capital-intensive technology.
For whom to produce?	The final question of the central problem in answered in the Indian economy separately by the government and private sector. While the government produces goods and services even for those who do not have purchasing power, the private sector produces goods and services only for those consumers with purchasing power.	This can be explained by the example of Government and Private sector banks. While the government sector banks open branches even in rural areas where they do not get much income, the private sector banks open branches mostly in urban areas apart from necessary branches in rural areas as per government regulations. They do not focus as much on rural areas because the profits are lesser in those areas.

CONCLUSION

In the Indian economy there is equal presence of public and private sector and therefore, the central problems of the economy are jointly answered by public and private sector.

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