Central Problems of Economics

FUNDAMENTAL ECONOMIC PROBLEMS

Economic Problem: Due to the scarcity of means and the multiplicity of ends, the economic problem
lies in making the best possible use of our resources so as to get maximum output satisfaction in the
case of a consumer and maximum output or profit for a producer. Hence economic problem consists
in making decisions regarding the ends to be pursued and the goods to be produced and the means to
be used for the achievement of certain ends.

Fundamental problems facing the economy:

1. What to produce: The first major decision relates to the quantity and the range of goods to be
produced. Since resources are limited, we must choose between different alternative collection of
goods and services that may be produced. It also implies the allocation of resources between the
different types of goods. Example: Consumer goods and capital goods.
2. How to produce: Having decided the quantity and the type of goods to be produced, we must next
determine the techniques of production to be used. Example: labor – intensive or capital – intensive.
3. For whom to produce: This means how the national product is to distributed, i.e., who should get
how much. This is the problem of the sharing the national product.
4. Are the Resources Economically Used? This is the problem of economic efficiency or welfare
maximization. There is to be no waste or misuse of resources since they are limited.
5. Problem of Full employment: Fullest possible use must be made of the available resources. In
other words, an economy must endeavor to achieve full employment not only of labor but of all its
resources.
6. Problem of Growth: Another problem for an economy is to make sure that it keeps expanding or
developing so that it maintains conditions of stability. It is not to be static. Its productive capacity
must continue to increase. If it is an under – developed economy, it must accelerate its process of
growth.

First three problem face by every economy whether developed economy or developing economy.
Last three problem faced by only developing economy.

CAUSES OF ECONOMIC PROBLEM :

i)Scarcity of resources
ii)Unlimited wants
iii)Limited resources having alternative uses

Prepare by :- Manju Tyagi

Production possibility frontier

Ans :- It is a boundary line which shows that maximum combination of two goods which
can be produced with the help of given resources and technology at a given period of
time. Ex: An economy can produce two goods say rice or oi
l by using all its resources. The different combination of rice and oil are as follows:
Production Possibilities unit of cell phone unit of computer
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0

Assumptions

1.The society has a fixed amount of available common resources. i.e., the
same limited resources can be used to produce either of the goods.
2. The society has a fixed amount of technology
3.Full employment of resources
4.The choice is between producing two goods: Machines and Food. All other goods and services are
assumed being the same (ceteris paribus). This assumption is to allow the use of simple graphical
analysis.

Prepare by :- Manju Tyagi