Central Problems Of An Economy- Meaning, Types, Examples

Central Problems of an Economy : Study Material

Central Problems of an Economy

An economic problem generally means the problem of making choices that occurs because of the scarcity of resources. It arises because people have unlimited desires but the means to satisfy that desire is limited. Therefore, satisfying all human needs is difficult with limited means.

Causes of Economic Problem

Scarcity of resources: Resources like labour, land, and capital are insufficient as compared to the demand. Therefore, the economy cannot provide everything that people want.

Resources like labour, land, and capital are insufficient as compared to the demand. Therefore, the economy cannot provide everything that people want. Unlimited Human Wants: Human beings’ demands and wants are unlimited which means they will never be satisfied. If a person’s one want is satisfied, they will start having new desires. People’s wants are unlimited and keep multiplying, therefore, cannot be satisfied because of limited resources.

Human beings’ demands and wants are unlimited which means they will never be satisfied. If a person’s one want is satisfied, they will start having new desires. People’s wants are unlimited and keep multiplying, therefore, cannot be satisfied because of limited resources. Alternative Uses: Resources being scarce, the same resources are used for different purposes. and it is therefore essential to make a choice among resources. For instance, petrol is used in vehicles and is also used for generators, running machines, etc. Therefore, the economy should now make a choice within the alternative uses.

List of Economic Problems:

(A) What to produce?

A country cannot produce all goods because it has limited resources.

It has to make a choice between different goods and services.

Every economy has to decide what goods and services should be produced.

Example: If a farmer has a single piece of agricultural land, then he has to make a choice between two goods, whether to grow rice or wheat.

Similarly, our government has to decide where to allocate funds, for the production of defence goods or consumer goods, and if both, then in what proportion.

(B) How to produce?

This problem refers to the choice of technique of production. It arises when there is an availability of more than one way to produce goods and services.

There are mainly two techniques of production. These are: Labour intensive technique(greater use of labour) Capital intensive technique(greater use of machines)

Labour intensive technique promotes employment whereas capital intensive technique promotes efficiency and growth.

(C) For whom to produce?

The society cannot satisfy all the wants of all the people. Therefore, it has to decide who should get how much of the total output of goods and services.

Society has to make choice of whether luxury goods or normal goods have to be produced. This distribution or proportion directly relates to the purchasing power of the economy.

Examples of Economic Problems

CHIT-CHAT TIME

(In this conversation, Raju is asking his mother to cook pizza and French fries for him. But Mother is in the dilemma that if she prepares pizza for Raju, then how she could make salad for Raju’s father.)

Raju: I want my reward for this achievement.

Mother: Okay tell me. What do you want?

Raju: I want to eat Pizza and French fries. Please prepare it for me.

Mother: But Raju Vegetables are limited and today market is also closed and I have to prepare salad for your dad. Either I can prepare 2 Pizzas or Full plate of salad.

Raju: No, I want to eat Pizza and French Fries anyhow.

(Mother is thinking about what to prepare as vegetables are available in limited quantities.)

Mother: Ok I will prepare 1 Pizza and French Fries for you and half plate salad and French Fries for your dad.

(Mother is chopping potatoes for French fries and vegetables for pizza)

Raju: Mom, How much time you will take to prepare my meal.

Mother: Dear, wait for 20 minutes.

(Mother called Rahul, Your pizza and French fries is ready now)

Raju: Thanks Mom.

Mother: Did u like it? Is it Yummy?

Raju: Yes mom. Pizza is out of the world. But…

Mother: But.. what?

Raju: Fries served in McDonalds are different from ours, I mean shape, size and crispiness of our fries is not up to the mark.

Mother: Yeah I agree, But McDonald prepare fries with the help of automatic hi-tech machines. Dear, quality differs when goods made by automatic machines (capital intensive technique) and when goods are handmade (labour intensive techniques)

(In the above conversation Mom is trying to explain Rahul that there are two types of production techniques Capital intensive technique and labour intensive technique)

(Dad sitting on the dinner table and asking Rahul’s mother why she has prepared only half plate salad)

Father: Sneha, why have you prepared only a half plate salad for dinner today?

Mother: Today, Raju got full marks in Business studies Test.

Father: Oh wow! Great.

Mother: So he demanded to pizza. But Vegetables required to prepare pizza fell short and market was also closed.

Father: Oh! Then what did you do?

Mother: Then I thought to make fries with pizza and spared some vegetables for salad.

Father: Great job! You are smart wife and also a smart mother. Who knows how to make optimum utilization and effective allocation of limited resources. I think you are the true economist in our home.

LETS PRACTICE

Central Problems Of An Economy: Meaning, Example

Central Problems of an Economy

The basic economic activities of life are production, distribution, and disposition of goods and services. A society will be facing scarcity of resources during the time of fulfillment of these activities.

Scarcity is evident, due to the availability of limited resources, and human needs having no limit. This variation between the supply and demand leads to the formation of central problems of an economy.

The central problems of an economy revolve around the following factors:.

What to produce? How to produce? For whom to produce?

Let us discuss these points in detail.

What to produce?

It is one of the central problems in an economy. It is related to the type and quantity of goods and services that need to be produced.

Since resources are in limited quantities, producing more of one good will result in less production of the other.

How to produce?

This aspect deals with the process or technique by which the goods and services can be produced. Generally, there are two techniques of production:

Labour intensive techniques Capital intensive techniques

The choice of technique for production depends on the availability of the resource in that nation, hence resource allocation becomes a challenge.

For whom to produce?

This problem deals with determining the final consumers of the goods produced. As resources are scarce in an economy, it becomes difficult to cater to all sections of the society.

It leads to a problem of choice in an economy as a good that may be in demand among one section, may not be in demand for another section of the society.

Such a situation arises due to the difference in income distribution among the population, which causes a change in buying behaviour.

With this, we conclude the concept of central problems of an economy. Stay tuned to our website for more such exciting updates.

Four challenges for the global economy in 2022

Over the last two years, the pandemic has played a major role in shaping the global economy. Many sectors have found themselves in difficulty and are still struggling, and the countries dependent on those sectors are now quietly trying to get back up again. Despite the strong economic recovery in 2021, the financial difficulties are not over and may still cause economic slowdown. In addition, many countries are faced with an increasing debt burden, high inflation and, burning issue of the moment, geopolitical tensions, which all play a major role. A summary is given below.

1. Economic slowdown

To limit economic damage, many countries introduced support measures; once again, to rebuild their economies, many are having to take the necessary measures. Partly as a result of that, the global economy is experiencing a strong rebound, but it remains to be seen how long it will last. A new wave of Covid-19 could quickly destabilise this shaky recovery.

We see this happening, for example, in China, which is currently experiencing a slowdown in growth. In recent months, the country has been hit by several virus outbreaks, following which the government decided to re-impose stringent, far-reaching restrictions. Moreover, the crisis in the key real estate sector is also damaging economic activity, with all the resultant consequences. At a global level, this slowdown will impact China’s commercial partners and have an effect on the price of raw materials.

2. Increasing debt burden

A second consequence of the pandemic and the recovery plans put in place is a huge increase in national debt. This poses a particular problem for emerging countries where the economic impact of the pandemic has been somewhat mitigated thanks to the temporary suspension of debt servicing for the poorest of them. The consequences of taking this measure away are still a matter of conjecture.

Governments are not the only ones left with huge debts; companies in the private sector are in the same situation, and here we are thinking primarily of companies in the service sector, for example in tourism, culture and aviation. Furthermore, the disruption of global supply chains, rising raw material prices and high goods transportation costs are also causing concern among companies.

3. Inflation

A third challenge facing the global economy is inflation, due in part to ongoing supply problems and rising demand as a result of the economy’s resurgence in a post-Covid era. And product scarcity goes hand in hand with higher prices. In response to inflationary pressure, the American Federal Reserve intends to tighten its monetary policy. It previously announced it would likely raise interest rates in March, which would be the first time since December 2018. As a result, vulnerable countries are at risk of finding it more difficult to access the capital market. It is not excluded that the European Central Bank would also hike up interest rates.

On top of that, many businesses are finding it difficult to increase their prices, meaning that their profit margins are decreasing significantly. Higher living costs are also leading to social unrest.

4. Geopolitical tensions

The last and probably biggest risk is caused by geopolitical tensions. The first thing that comes to mind is the Russia-Ukraine war, where the fighting but also the sanctions imposed are greatly affecting the region as well as Europe and the global economy. You can find the most recent updates on this page.

Further afield, in Asia, next to the military tensions around Taiwan, there are the ongoing trade tensions between China and the USA over semiconductors. To short-circuit Chinese technological development, the USA has imposed sanctions on the sector, in some cases at the expense of its own industry.