BASIC PROBLEMS OF AN ECONOMY

Just like resources are scarce for humans, all countries face the problem of scarcity of resources without any exception. Since wants are unlimited and resources are scarce, the economic issue arises. But, the point to be noted is that resources are not only scarce but can also be used for alternative purposes. For e.g. money is a resource that can be used for multiple purposes. For e.g., you can buy a book,  alternatively you could also buy a dress. This alternative nature of resources causes economic issues. If the resources would only have a single use, then no economic issue would arise. Every economy be it capitalist, socialist or mixed has to face this issue of scarcity of resources, this is called the central economic problem.

 The central economic problem will be further divided into four basic problems:

1. What To Produce?
2. How To Produce?
3.  For Whom To Produce?
4. What Provisions (if any) are to be made for Economic Growth?

Let us understand each of these points in detail:

1.     What To Produce?:  Since resources are scarce, every society has to decide which goods are to be produced and also how many units of each good or service should be produced? An economy has to decide whether to produce more television sets or hospitals. Not only does the economy have  to decide  about what to produce but also in how much quantity these goods need to be produced?  For example how many meters of cloth, how many medical colleges, how many hospitals need to be produced?

2.  How To Produce?:  There are various techniques for producing a commodity. For example : cloth can be produced either by handlooms which requires more labor or it can be produced by using automatic looms or machines, which requires more machines and capital. The company has to decide whether it needs to produce cotton using capital-intensive techniques or labor intensive techniques. The choice would depend upon the availability of factors of production i.e., labor and capital in this case and their relative prices. An economy would go with those techniques of production that make the best use of available resources.

3.   For whom to produce?: since resources are scarce and wants are unlimited , a society can not satisfy the wants of all. Thus, an important decision which the society has to take is for whom to produce? A society has to decide who should get how much of the output of goods and services. I.E., how goods and services are distributed among the members of the society? It has to decide about the shares of different people in the national cake of goods and services.

4. What Provisions (if any) are to be made for Economic Growth?If a society uses all its resources for current consumption and no provision is made for the future, a society’s production capacity will not increase. Therefore, a society would not like to use all its resources for current consumption only. This implies that incomes or the standard of living of people would remain stagnant and in future, the levels of living may actually decline. Therefore, a society has to decide how much savings and investment (I.E., how much saving of current consumption) should be made for future progress.

        What do you mean by an economic system?

        An economic system is an organized way in which a country allocates resources and distributes goods and services across the whole nation or a given geographic area. It includes the combination of several institutions, entities, agencies, decision-making processes and patterns of consumption that make up the economic structure of a specific community. Hence it is a type of social system. An economic system defines how all the entities in an economy interact. An economic system refers to the sum total of arrangements for the production and distribution of goods and services. In short, it is defined as the sum of the total devices which gives effect to economic choices.it includes various individuals and economic institutions.

Different economies of the world solve central economic problems. But the question arises how do they solve these problems? In order to understand this we divide all the economies in three broad classifications based on :

• Mode of production
• Mode of exchange
• Mode of distribution and 
• Roles which governments play based on economic activity.

Classification of Economies:

1. Capitalist Economy
   Capitalism is an economic system in which private actors own and control property in accordance  with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society. The essential feature of capitalism is the motive to make a profit.
   Examples of Capitalist Economies

2. Socialist Economy
   A socialist economy is a system of production where goods and services are produced directly for use, in contrast to a capitalist economic system, where goods and services are produced to generate profit (and therefore indirectly for use). “Production under socialism would be directly and solely for use.
   Examples of Socialist Economies

3. Mixed Economy
   A mixed economy variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economies is a combination of free-market principles and principles of socialism.
   Examples of Mixed Economies: