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Central economic problems

There are three types of economic system. They are: Capitalistic Economy, Socialistic Economy, and Mixed Economy. In any economy, population constitutes an important element. As already discussed, human wants are unlimited, but the resources to satisfy these wants are relatively scarce. All wants cannot be satisfied with scarce resources. These problems, scarcity of resources are not only felt by the individual but also by the entire society. For the satisfaction of wants, the problem of use of scarce resources arises. This is called “the central economic problem”. The central economic problems are of four types:
  • What to produce?
  • How to produce?
  • For whom to produce?
  • What provisions are to be made for economic growth?

What to produce?

As human wants are unlimited and resources are scarce and have various alternatives, an important decision as to what goods are to be produced among various alternatives available and how much is to be produced should be taken by the society so that there can be optimum utilisation of scarce resources. What to produce means, what type of goods to be produced? Whether to produce high quality or low quality goods? Whether to produce more durable goods or perishable goods? Whether to produce more of consumer goods or capital goods? This fundamental question to be decided, because, resources are scarce. If resources were abundant, we might have produced all type of goods, without any worries.

How to produce?

After deciding what and how much to produce, the society has to decide the method of production i.e., whether it would use labour intensive techniques or capital intensive techniques. This decision is based on the availability of the factors of production or we can say inputs i.e., labour and capital. How to produce involves three sub problems. They are:- What resources to be used? Which technology to be used and Where to produce it?



  • Labour intensive technique refers to the use of more labour in the production process.
  • Capital intensive technique refers to the use of more number of machines compared to labour in the production process.

After deciding that cloth has to be produced, it has to be decided if the production will consists of labour related factors or capital related factors, or a combination of both.

For whom to produce?

The society has to decide its target market as the wants of all people cannot be satisfied. It has to decide the share of different people in the total output of goods and services.



If it is decided by a firm that it would produce soaps, it should decide the sector of the market it is targeting. The product and its price will depend on the target market.

What provisions are to be made for economic growth?

A society should not use all of its scarce resources for current consumption only, without making any provision for the future as the society’s production capacity would not increase. So, the economy has to decide how much to save and investment for future growth. Nowadays we speak about sustainable development, wherein which, the economy concentrates on satisfying the needs of the present generations, without compromising with the needs of the future generations.

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