BASIC PROBLEMS COMMON TO ALL ECONOMIES

An economy is a mechanism through which the scarce resources are prioritized and organized for the production of goods and services. 

Every economy faces fundamental problems due to multiplicity of human wants, scarcity of resources and alternative use of the scarce resources.

According to Prof. P.A. Samuelson, there are three basic and interdependent problems faced by every economy. They are:

1. What to Produce?  The Problem of what to produce is the problem of deciding as to:  a) What goods should be produced and b) How much of each of the goods should be produced?  It is the problem of allocation of the available resources for the production of different goods.  The problem becomes more difficult if the scarce resources are fully employed. 

In a free capitalist economy, the consumers through the prices which they are prepared to pay guide the production and quantity of goods.

In a socialist economy the central planning authority decides what goods and what quantity are to be produced.

In a mixed economy the central planning authority decides what to produce and how much to produce?  To some extent the consumers preference and price mechanism guide production.

2.  How to Produce?  The problem of how to produce means deciding the combination and technology to produce the goods.

b) The scale of production and c) the sector of production.

In a capitalist economy, goods are produced by the private sector.  In a socialist economy, goods are produced by the public sector and in the mixed economy strategic goods are produced by the public sector and consumer goods are produced by the private firms.

3.  for whom to produce?  The problem of “for whom to produce means deciding as to how the various goods produced in the country should be distributed among the different sections of the society.

In a capitalist economy, goods will be distributed among those who are capable of paying for them (price mechanism)

In a socialist economy the central planning authority decides and in the mixed economy this question is decided by the central planning authority and to certain extent by the consumer’s preference and the pricing system.

4.  The problem of economic efficiency:  every economy has to use its resources efficiently to avoid wastage of scarce resources.

5.  The problem of full employment of resources:  Since the resources are scarce the available resources have to be fully utilised.

6.  The problem of Economic growth:  Every economy has to increase its ability to produce more goods and services with available resources.