CENTRAL PROBLEMS OF AN
There are three types/ forms of economy:
• Capitalist economy
• Socialist economy
• Mixed economy
In a capitalist economy like USA, the central
problem of what, how and for whom to produce
are solved through interaction between market
forces of demand and supply (price mechanism).
There is least government interference.
In a socialist economy like erstwhile U.S.S.R
(Union of Soviet Socialist Republics), the
central problems of what, how and for whom to
produce are solved by the government agency
known as the Central Planning Commission.
In a mixed economy like India, the central
problem of what, how and for whom to
produce is solved through the market forces of
demand and supply government regulation
known as ‘regulated price mechanism’
Demand refers to the quantity of a good or
service that the consumers are willing and
able to purchase at a certain price during a
specific time period.
A demand schedule is the tabular
representation of different quantities of a
commodity demanded at different price
A demand curve is the graphical
representation of a demand schedule. It
depicts the relationship between the price of a
commodity and its quantity demanded.
Price of the commodity: There is an
inverse relationship between the price and
the quantity demanded of a commodity.
When the price of a commodity rises, its
quantity demanded falls and when the price
falls, its demand rises (provided the other
things remain constant). This is the Law of
Price of related goods: Goods are said
to be related when the price of one good
influences the demand for other good.
Related goods are of two types:
• Substitute goods
• Complementary goods
If the price of a substitute good increases, the
demand for the related good will increase and vice
versa. For example, tea and coffee are the substitutes
of each other. If the price of coffee increases, the
demand for tea will increase because the customers
will substitute tea for coffee.
If the price of a complementary good rises, the
demand for other related good will fall and vice versa.
For example, car and petrol. If the price of car rises,
the demand for petrol will fall. So, there is an inverse
relationship in case of complementary goods.
Income of the consumer: The effect of
change in income on demand depends upon
the nature of the good, on the basis of which
the goods can be classified as:
• Normal good- The demand for normal goods
increase with the increase in income. There is
a direct relationship between the income and
the demand for a normal good.
• Inferior good- The demand for inferior goods
decrease with the increase in income,
irrespective of the price change. Thus, there is
an inverse relationship between the income
and the demand for an inferior good.
Change in taste : A favourable change
in the taste of the consumer will shift the
demand curve to the right whereas an
unfavourable change in the taste will shift
the demand curve to the left.