Introduction

Every economy faces the problem of choice. The reasons behind this problem are –

● Unlimited human wants

● Limited resources to satisfy the human wants

● The available resources can be put to alternative uses.

Therefore, we can say there would have been no problem if the scarce resources would have had single use. The real difficulty arises due to alternative use of resources.

So, the economic problem is mainly the problem of choice making or decision making. These problems are very common to every economic system and are known as “central problems of an economy”.

Basic Economic Problems

1) What to produce - The first basic problem for every economy is “What to Produce”

The requirements of every economy are unlimited; the resources are capable of being put to alternative uses. So the economy will have to make a choice between different commodities.

The economy has to decide between the capital goods or consumer goods. The economy may produce more of capital goods or consumer goods; it depends upon the urgency of want.

Eg - The available quantity of steel in an economy may be used for producing –

Consumer Goods - Automobiles, Washing Machine, Refrigerators

Or

Capital Goods - Machineries

2) How to produce - The other related problem is the problem of choice of technique i.e. “How to Produce”

There are two techniques of production -

• Labour intensive

• Capital intensive

Use of labour intensive technique means economy chooses to make better use of its available manpower.

Use of capital intensive technique means the economy is anxious to build up the infrastructure for rapid economic growth

3) For whom to produce - It is the problem of distribution of income between different groups in society as well as related with for when to produce present or future. It depends upon the monetary and trade policy of the economy.

If the economy produces capital goods using capital intensive technique it means it is producing for future generation.

Therefore, the basic economic problem of any Nation is to make choice among alternative uses of scarce resources. The ultimate goal of any Nation should be to make a choice among the available alternative in such a way that maximum satisfaction could be obtained from limited resources.

Production possibilities mean the various combinations of two given goods that can be produced using the fixed resources in an economy. It is based upon the assumption that the resources are fully and efficiently used. It is based upon the problem of what to produce. As we know that the resources are limited with alternative uses, i.e the available resources can be used in several manners.

For eg – Suppose an economy can produce only two goods – TV and Computer using the same resources in such a manner that if all the resources are used to produce TV then no computer could be produced and vice versa.

So there exists the need of choice that how many units of TV should be sacrificed to produce some units of computers i.e, it devotes some of the resources in producing TV and some in Computers.

The various possibilities of producing both the articles are listed below –

The above table shows that if we produce 2000 computers then the production of TV sets will be zero. In the same manner if 5000 TV sets are produced the production of computers will be zero.

The possibilities 2nd, 3rd, 4th and 5th also show that how the increase in production of TV sets will affect the production of computers.

This is what we call production possibilities of an economy which arises due to scarcity of resources having multiple uses.

Production possibility Frontier is the graphic presentation of various possibilities of production. It is also called production possibility curve. It represents the possibilities of producing two goods using fixed resources.

We will understand it with the following table and graphic representation –

Economics may be defined as social science which is concerned with production, distribution and consumption of goods and services.

It studies how individuals, businesses, governments and Nations make choices regarding allocation of resources to satisfy their needs and wants.

It also determines how these groups should organise and co-ordinate their efforts to achieve maximum output

Economics may be defined as Science as well as art.

Like science economics is also systematized body acknowledge. The various facts relevant to economics are systematically collected classified and analysed. Economic phenomena are capable of being measured in terms of money.

Therefore, Economics is the science which studies human behaviour as a relationship between various needs and resources having alternative uses.

As an art, economics need to be practised for the purpose of solving various problems using statistical techniques

A centrally planned economy is an economic system in which the state or government makes economic decisions. Under a centrally planned economy, governments own all of the factors of production such as land, capital, and resources, and government officials determine when, where and how much is produced at any one time. This is also sometimes referred to as a "command economy."

In a planned economy, the decision-making is centralized so the government controls all of the supply and sets all of the demand. Prices are set by government officials.

Socialism and communism need a command economy to create a central plan that guides economic decisions.

The examples of centrally planned economy are – China, North Korea, etc

A market economy is a system where the laws of supply and demand direct the production of goods and services. Prices are fixed in a market economy on basis of the equilibrium of supply and demand.

Consumer preferences and resource scarcity determine which goods are produced and in what quantity; the prices in a market economy act as signals to producers and consumers who use these price signals to help make decisions. Governments play a minor role in the direction of economic activity.

A free market economy is an economy which the government plays a small role in.

The two fundamental features of market economics are:

1. Private ownership of the means of production

2. Voluntary exchanges / contracts

The perfect example for market economy is United States of America.

Economics as a positive science means the study of "what is" which means that what the present status is.

The positive economic analysis is the analysis of present economic position.

Suppose if I say that the wage rate per hour in the country is rupees 60 it is positive economic statement or if I describe the present education standard of the country it will be a positive economic statement.

Thus positive economic analysis deals with the things as they are their causes and effects. Here no judgements are passed.

Economics as a normative science means "what ought to be".

Normative economic analysis is about what should be the ideal position in respect of a particular thin.

For example if we say that the daily wage rate should be Rs 100 it will be a normative economic statement in the same manner if we describe the present employment status of the country it will be a positive economic statement where as if we describe that what should be the employment status it will be normative economic statement

Therefore normative economic analysis deals with things as they ought to be and it passes judgement regarding correctness of a phenomena or otherwise

Economics has two major branches microeconomics and macroeconomics

The branch of economics which deals with behaviour of individual economic unit like individual firm or a consumer or demand for a commodity is microeconomics.

The branch of economics which deals with the behaviour of economy as a whole is macroeconomics like study of national income aggregate consumption extra.

Both the branches microeconomics and macroeconomics are interrelated and complementary to each other. Every microeconomic problem involves macroeconomic analysis and every macroeconomic problem requires microeconomic analysis yet there are certain differences between them –