Lesson – 13

Central Problems of an
Economy
Summary
The central problems os an economy arises because of improper adjustment
between unlimited wants and limited resources. It is universal in nature for
every type of economy of the world weather it is developed or developing
economy. This concept provides basis for every economy how to make plans and
strategies for optimum utilization of available resources to meet the objectives
economic growth and development. In this chapter we will discuss about the
concept of production possibility curve with the help of tabular and graphical
presentation. We will also learn about how various types of central problems an
economy is explained with the help of production possibility curve.

Why do Economic Problems Limited Resources

Arises
 Resources are scarce in
relation to our wants and
Unlimited Wants economy cannot produce all
what people want. It is the
principal reason for
Limited Resources
existence of economic
Alternative Use of problems in all economies.
Resources

Alternative Uses of Resources

Unlimited Wants
 Resources can be put to
alternative
A person needs food, water, clothing and shelter in order to survive. uses. As a result,
People, by nature, want more than what they just need forthesurvival.
economy want
If one has is
tosatisfied,
make amany others
and this goes on endlessly. choice between the alternative
uses of the given resources.

Learner`s Guide, Senior, Secondary Economics,(318)

 Central Problems of an Economy

Central Prolems
of an WEconomy

Allocation of Resources Opimum Utilisation of Resodces

How to Achieve Economic
Growth

What to Produce How to Produce For Whom to Produce

Allocation of Resources  the production process is

What to produce? called a capital intensive
The fact that resources are scarce leads to the problem oftechnique.
‘what to produce’ and in what quantities to
An individual producer needs to decide on how to employ the sources that are available for production.
How to produce? For whom to produce?
This problem is related to technique of production.
A technique of production could be either labor intensive
 The or problem
capital intensive.
of ‘for whom to
In a production process when more units of labor are used in
produce’ relates to how the
value of the produced
output of an economy gets
distributed amongst different
people.
 The problem of for whom to
produce tells us how the
different factors
of production are
compensated for their work.

Other Central Problems

of the Economy
Optimum Utilization
proportion to termed as a technique.
capital,itis of Resources
Alternatively, laborintensive
proportion of Optimum utilization of resources
 when the has the following implications –
capital used is a) All resources must be
more than labor, Utilized

Learner`s Guide, Senior, Secondary Economics,(318)

 Every economy must ensure that scarce resourcesConcept
are utilizedofand not left idle or
Production unemployed.Curve
Possibility
b) Efficient Utilization of resources Definition - Production possibility curve is the graph
Under utilization of resources creates economic problems.
PPC is based on the following assumptions –
Every economy must try and

adopt production
techniques
efficient
that
of ensure
resources. utilization of

 Theresources fixed.availableare
Theresources
 fixed. availableare
Growth of resources

 Resources satisfy Theresourcesarefully employed.

increasing economy. resources
mustgrowto
economy? the constantly The resources are efficiently
wants employed.
in an can an
So,how can
grow in
Resources Production Possibility
increase if – Schedule
a) There are in quantitative
changes (Increase
pn theresources. It shows tabular presentation of the
quantity of possible production of two
available resources) commodity with the given amount of
b) There are qualitative changes in resources. resources
(TechnologicalandImprovement).
technology of an
Growth of resources occurs when the physical economy.
availability of resources increases and/or there is tec
in the quality of resources.
possibility Wheat Cloth MRT
(Units) (Units)
A 15 0 -
B 14 1 1
C 12 2 2
D 9 3 3
F 5 4 4
E 0 5 5

Learner`s Guide, Senior, Secondary Economics,(318)

 Production Possibility Curve
The graphical presentation of producing probable combination of two commodities with the given leve

Under Utilization or Inefficient Utilization o

As we know any point on the production possibility cu
When the economy functions at a point inside the produ
Point X is showing under utilization of resources where

Quantity of factors of
Properties of PPC
production is fixed
Full employment
 PPC slopes downward: This
Technology is given
means that more of a
There are two goods produced
good can be produced
only by sacrificing some
quantity of the other good.
 PPC is concave to the point
of origin.
 MRT (Marginal rate of
transformation) measures
the rate of change of PPC or
simply the slope of PPC

Change in Wheat
MRT =
One uint chane in
cloth
The curve is based on the
following assumptions -

Learner`s Guide, Senior, Secondary Economics,(318)

 Growth of Resources
Evaluate
Growth of resources occurs when the physical quantum of resources increases or when there is a rise in
Growth of resources implies increase in production.

Yourself
Q. Sketch out central problems of an
economy.

Q. Distinguish between labour –

Learner`s Guide, Senior, Secondary Economics,(318)