Central Problem of Economy

Published On : 2019-07-30

Economics: A study of economy.
It studies the relation between inflow & outflow of money in an economy.
To define economics we can say that a system which studies how to use the limited resources to satisfy all never ending human wants.
 
Types of Economics: Economics can be broadly classified in Micro and Macro aspects.
 

Micro Economics	Macro Economics
Micro is derived from Greek word Mikros which means individual.	Macro is derived from Greek word Makros which means whole.
Micro is that part of economics which studies individual behavior of units.	Macro is that part of economics which studies aggregate behavior of units.
It is also called Price Theory.	It is also called Income & Employment Theory.
The basic tools are demand & supply.	The basic tools are aggregate demand& aggregate supply.
The main focus is on allocation of resources.	The main focus is on National Income.
It works on Partial Equilibrium.	It works on General Equilibrium.

 
Scope of Economics: Economics is a scientific art. It deals with practical use of theories. But to study economics one should know the difference between Positive Economics & Normative Economics.
 

Positive Economics	Normative Economics
It studies: What is, what was, & what will be.	It studies: What is ought to be.
It does not give any judgments.	It gives judgments.
It does not provide any solution.	It provides solutions.
Ex: Population of India is growing.	Ex: Population of India should be controlled.

 
 
Economy: A system by which people earn their living.
 
Types of Economy: Economy can be of three types, Capitalist, Socialist & Mixed Economy.

 

CAPITALIST ECONOMY	SOCIALIST ECONOMY	MIXED ECONOMY
It is also called as Market economy.	It is also called as Centrally planned economy.	--
The word capitalist is made up of CAPITAL which means money.	The word socialist is made up of SOCIETY which means GROUP OF PEOPLE.	--
In this economy all means of production are owned by private sector.	In this economy all means of production are owned by public sector.	In this economy all means of production are owned by both public & private sector.
There is no role of govt. in market.	There is no role of private sector in market.	Both sectors play their distributed roles.
All economic decisions are taken independently by market economy.	All economic decisions are taken by govt.	All economic decisions are taken by both sectors.
Price is determined by private sector.	Price is determined by public sector.	Price is determined by forces of demand & supply.
Central problems of economy are solved through Price Mechanism.	Central problems of economy are solved through planning authority.	Central problems of economy are solved by both sectors.
The basic objective is Profit Maximization.	The basic objective is public welfare.	The basic objective is economic growth.
Prices are relatively high.	Prices are relatively low.	Prices are normal.
Social welfare is ignored.	Social welfare is taken care of.	Profit maximization & social welfare both are taken care of.

 

Central Problems of Economy: Every economy is different but has to face basic economic problems which can be well understood as:

Synonyms of Central Problems of Economy

• Economic problem

• Problem of choice

• Problem of allocation of resources

• Basic problems of an economy

 
Unlimited Human Wants: Human wants are unlimited and are never ending. As one want is satisfied, another arises. One needs to choose among the needs related to the priority.
 
Resources are limited: Resources are limited in relation to their demand. It is the basic reason for economic problem in an economy.
Resources have alternate uses: As resources are limited and can be used to fulfill more than one need, they have alternate uses.
 
All these take form of Central problems of economy, which can be understood as:

What to Produce? An economy has uncountable commodities to produce and it has to decide what the prior needs are and which goods are to be produced, the decision has to be taken among different types of goods.

How to Produce? After deciding upon what goods are to be produced, next problem faced by an economy is choice of technique of production. Any economy has basic two techniques, Labor Intensive & Capital Intensive; the decision of choice has to be taken among these two techniques of production.

For Whom to Produce? This problem is related with the distribution of income and goods. The distribution can be done as per the purchasing power and as per the needs. It is about selecting the category of people who will be consuming the produced goods.

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SUGGESTED LINKS

1. Central Problem of Economy

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3. Demand Theory

4. Demand Function