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Basic Economic Problems of an Economy

Here we understand what is economic problem, meaning of economy and basic problems of an economy in detailed.

Basic Economic Problems of an Economy
First, we understand the meaning of Economic Problem and what is Economy.
Meaning of Economic Problem:
According to Prof. Robbin's definition when our wants are unlimited and the means to satisfy them are scarce and have alternative uses, there arises problem of choice. According to him, we have to choose the uses to which the resources are to be employed.
Means, Economic problem is the problem of 'economising' scarce resources with alternative uses. Maximum output or utility is attained.
Economy
An economy is a system by which people earn their incomes or make their living, say it is system which provides people with the means to earn a living. "An economy consists of nothing else but an immense co-operation of workers or producers to make things and to things which consumers want."
Now, we will discuss about basic problem of an economy in detailed.
Basic Problem of an Economy:
Basic problems of an economy may broadly be classified into the following categories:
  1. What to produce and in what quantity?
  2. How to produce?
  3. For whom to produce?
  4. Are the resources being efficiently used?
  5. Is the economy growing or remaining stagnant?
Now, we discuss these problems in detail:
  1. What to Produce and How much? - The resources at disposal of society are limited, production of one commodity would be at the cost of the other. If a resource is used in one occupation, it not available for another. In context of limited resources with alternative uses, the economy has to make a choice between the goods and services which have to be produced and those whose production given up at the moment. This involves the preparation of a list of priorities indicating the goods and services whose production has to be given first preference over others and allocate the necessary resources for the same. Let us take an example - Suppose the economy has to make choice as to how much of the resources should be allocated for the production of consumer goods and how much for the capital goods? Here, the economy has to balance between the two. Similarly, it has to decide how much of the resources should be allocated for the defense sector and how much for the civilian sector? As regards quantity to be produced, depend on the economic conditions of the people. For an economy with a large population belonging to lower income group, production of articles of mass consumption will have to be given first priority over that of luxurious and semi-luxurious goods. In a free market economy what is to be produced and how much is determined by market forces, while in a socialist, it is the State or its agency, Planning Board will decide what commodities are to be produced and in what quantities.
  2. How to Produce? - Having decided as to what is to be produced and in what quality, the next problem of an economy is how to produce good and services. i.e., with which methods of production. The solution of this problem depends on the availability of resources, the quality of resources and the state of technological development within the economy. It is relating to the choice of technology.
  3. For whom to Produce? - This indicates to the problem of distribution of the national product among various sections of the society. One has to decide as to how much of the national product should be made available to the Government for meeting its requirements of defense and other needs and how much should be used or allocated for civilian consumption. Here it is noted, the problem of distribution of national product among various factor-owners is determined in a capitalist economy by the price mechanism, in a socialist or planned economy, is done through planning commission under the control and direction of the state.
  4. Are the Resources being Efficiently Used? This is also one of the basic problem of an economy to use resources efficiently. This relates to the problem of economic efficiency or welfare maximisation. The resources of the economy are fully utilised and there is no waste or misuse of resources. If the resources remain idle, unutilised or misutilised, appropriate monetary fiscal and physical measures should be adopted and corrective action intiated.
  5. Is the Economy Growing or Stagnant? - Another problem of an economy to see that it keeps on growing, expanding and developing, to achieve welfare maximisation for its people. If the economy is stagnant or growing at a slow rate, the growth has to be accelerated through higher rate of capital formation and by adopting economic policy. The economy should grow at a rapid pace and high growth rate must sustained. It relates to integrated economic measures.
Conclusion:
It should be clear that various central problems of an economy discussed above are interrelated and interdependent. Problem relate to micro-economics and macro-economics both. Every society faces the basic economic problem of choice and allocation of scarce resources among various uses. The society which uses its resources in the most optimum and efficient manner and also distributes the national product among various sections of the community ensures greater welfare development for its masses. 
If the resources remain idle or are misallocated or misused, economic welfare of the people is adversely affected by it.
Basic Economic Problems of an Economy
Meaning of Economic Problem
Economy
What to produce and in what quantity?
How to Produce?
For whom to Produce?
Are the resources being efficiently used?
Is the economy growing or remain stagnant?
Definition of Economics and Price Mechanism - Basic Economic Problems of an Economy.
Kinnari
Tech writer at NewsandStory
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