central problem of economy

Central Problem of Economy

What to Produce:-

Resources available in society are limited thus economy cannot produce all that society needs thus economy has to decide what good is to be produced in what quantity. For example, there are two goods in economy consumer goods
(milk, rice, etc.) and producer goods (machine, gun, etc.). The economy has to decide which good is to be produced as scarcity is the basic element of every economy. Here guiding principle is that economy should produce that good which satisfies the need of economy.

How to Produce:-

This problem is related to the technique of production as good can be produced by more than. There are two technique of production commonly known as ‘Labor intensive technique’ and ‘Capital Intensive Technique’. Labor Intensive Technique requires more labor and less capital whereas Capital Intensive Technique requires more capital and less labor. The economy has to decide which technique should be applied so that it requires the least amount of resources to produce a given level of output. Here the guiding principle is that economy should apply that technique which requires the least amount of resources to produce a given level of output.

Whom to Produce:-

This problem relates to the selection of the category of people for whom the good is to be produced. For example whether to produce to satisfy the need of poor or to produce more good for rich. This problem related to the selection of the category of people. Here guiding principle is that the good is produced in such a way so that it could satisfy the need of all categories of people.