Categories: Economics

What are the fundamental economic problems of economics?

According to Prof. Samuelson, every economy has three basic problems of resource allocation:
(a) What to produce and how much to produce?
(b) How to produce?
(c) For whom to produce?

(a) What to produce and how much to produce?

The first central problem of economy is related to problem of choice. First and foremost problem of economy is-What to produce or which goods and services should be produced so that maximum wants and needs of people could be satisfied with limited resources. Every economy has to choose that which want should be satisfied and which should be sacrificed, postponed or left? Regarding what to produce? Many production related options come before us for the solution of this problem.
When an economy decides what to produce; then next problem appears i.e. How much to produce’? or we have to decide that what quantity of consumption goods and capital goods should be produced? For example, if an economy wants to increase production of consumer goods like clothes and tea through limited resources in a definite time-interval then it has to reduce production of capital goods like tractor and television. Infact, producer would like to produce that quantity of goods which maximises his profit.

(b) How to produce?

Second problem before the economy is ‘how to produce’? In fact, it is the problem related to the choice of technique. There are two types of techniques of production:
(i) Labour-intensive Technique: In this technique. more quantity of labour is used as compared to capital.
(ii) Capital-intensive Technique: In this technique, more quantity of capital is used as compared to labour.
For example, clothes can be produced by both, handloom (d.e. labour-intensive technique) or power-loom (1.e. capital-intensive technique).

For solution of this problem, we should adopt that technique which utilises lesser limited resources. If the production from both the techniques is the same then the technique using less quantity of limited resources will be called more efficient technique.

(c) For whom to produce?

After getting the solutions of the problems of what? how much? and how? the next problem arises-“For whom to produce”? or “How to distribute the production ?”

There are two faces of the problem of distribution of production:
(a) First face is related to ‘Personal Distribution’. It means that how the produce should be distributed between different persons and families in the society. It is also related to the problem of unequal distribution of income.
(b) Second face of the problem of distribution is ‘Functional Distribution. It is related to determine how
the produce should be distributed among various factors of production as land, labour, capital and entrepreneur. It is not related to problem of inequality of income distribution.

jivtara

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