Class 11 Chapter 1st 
Introduction of Microeconomics
Topic – Central Problem Of An Economy



Central Problems Every economy faces three central problems. These are offshoots of the basic problem of resource allocation.
These are:
  •         i.            What to produce,
  •       ii.            How to produce and
  •       iii.            For whom to produce.


(1)     What to Produce?

It is a standard knowledge that resources are scarce in relation to human needs. We cannot produce all goods as much as we wish to produce.
Allocation of resources and the consequent problem of choice require that we decide what to produce and what not. We have to decide which wants are to be taken on priority and which ones can wait. It involves two-fold decisions:

a.       Firstly, the economy has to decide what goods and services are to be produced. For instance, which of the consumer goods like sugar, cloth, wheat, ghee, etc. are to be produced and which of the capital goods like machines, tractors, etc. are to be produced. Similarly, choice has also to be made between the production of war time goods like rifles, guns, tanks and peace lime goods like bread or butter
b.      When an economy has taken a decision as to what goods or services are to be produced, then it has to decide about its quantity. How much of consumer goods and how much of capital goods are to be produced. For instance, if an economy decides to produce more of cloth and wheat within a given period and with limited means, then it will have to produce less of machines.

(2)     How to Produce?
How to produce is the second offshoot of the problem of resource allocation How to produce means how to organize production/ This problem is concerned with the choice of technique of production
For example, production of cloth is possible either by handlooms or by modern machines this problem is concerned with the efficient use of resources It implies more production at less cost. Broadly there are two techniques of production:

(a)    Labour Intensive Technique: Under this technique, labour is used more than capital.

(b)   Capital Intensive Technique: Under this technique, capital is used more than labour. An economy must decide as to which technique is to be used in a given industry so that efficient production is obtained. Efficient technique of production is that which uses the least amount of scarce resources to provide the same amount of output or in other words, the production would be undertaken at minimum cost. The goods and services should be produced efficiently.

(3)    For Whom to Produce?
Third offshoot of the problem of resource allocation is for whom to produce'. While deciding what to produce' we cannot escape the decision on for whom to produce'. Essentially, this is the problem of distribution of final goods and services, or briefly the problem of distribution of production. Value of production in an economy is identical with the value of income. Thus the problem of distribution of production implies the problem of distribution of income.
This problem has two aspects:
(a)    The first aspect related to personal distribution. How should production (or income generated through production) be distributed among different individuals and households constituting society? It is also concerned with the problem of inequality in the distribution of income.

(b)   The second related to functional distribution. How should output (or income generated through production) be distributed among different factors of production viz. land, labour, capital and entrepreneur as their reward for the act of production? It is not related to the problem of inequality.