Basic Problem of an Economy which includes the common problem which is faced by all commodities of an Economy.

1. BASIC PROBLEMS OF AN
ECONOMY
OR
CENTRAL PROBLEMS OF AN
ECONOMY

2. WHAT IS AN ECONOMY ?

3. An economy is a system which
provides people, the means to
work and earn a living.

4. VITAL PROCESSES OF AN ECONOMY
Economy is a system which provides living to the
people. For this objective to be full filled, it is
necessary that every economy should undertake
three economic activities :
1. Production
2. Consumption
3. Investment or capital formation.

5. WHY ? WHY ? WHY? ECONOMICS…!
ECONOMICS

6. WHY TO STUDY ECONOMICS ?
Economics is studied because it enables us to understand
different aspects of an economy. However, the main reason
for study of Economics can be simplified to a single word
called SCARCITY. We all know, human wants are more than
the available resources. So, there is a need to allocate these
scarce resources for the satisfaction of never ending human
wants. Hence, Economics is concerned with selection of
resources under conditions of scarcity.

7. SCARCITY
Scarcity refers to the limitation of supply in relation
to demand for a commodity. Scarcity is Universal,
i.e. every individual, organization and economy faces
scarcity of resources.
Scarcity of resources calls for economizing of
resources. Economizing of resources refers to making
optimum use of the available resources. There is a
need to economize, as we have to satisfy our
unlimited wants out of limited resources.

8. SCARCITY IS NOT THE ONLY
PROBLEM…!
• Resources also have alternate (different) uses. Alternate
use of resources means that a resources can be put to
more than one use.
• For example : we all know, petrol is scarce in relation to
its demand. But there is one more problem. In addition to
its scarcity, it is used not only in vehicles, but also in
machines, railways engines, airplanes, generators, etc.
• Whenever, a commodity is chosen for one use, other
valuable uses will have to be rejected. It gives rise to the
problem of choice.

9. REAL LIFE EXAMPLES
1) Critical Supply Shortages — The Need for Ventilators and
Personal Protective Equipment during the Covid-19
Pandemic.
2) Hospitals see shortage of Drugs in COVID-19.
3) Lack of rooms for patient all over India even in foreign
countries.
4) India faced shortage of Onion.

10. ECONOMIC PROBLEM
Economic problems is a
problem of choice involving
satisfaction of unlimited wants
out of limited resources having
alternative uses.

11. REASONS FOR ECONOMIC PROBLEM

12. SCARCITY OF RESOURCES :
• Resources (land, labour, capital., etc.) are limited in relation to their
demand and economy cannot produce all what people want. It is the
basic problem of existence of economic problem in all economies.
There would have been no problem, if resources were not scarce.

13. UNLIMITED HUMAN WANTS :
• Human wants are never ending, i.e. they can never be fully satisfied.
As soon as one want is satisfied, another new wants emerges. Human
wants also differ in priorities, i.e. all wants are not equal intensity. For
some individual some wants important and urgent as compared to
others. This raises making choices. If all human wants had been of
equal importance, then it would have become impossible to make
choice.

14. ALTERNATE USES :
Resources are not only scarce, but they can also be put to various
uses. It makes choice among resources more important. As, a result,
economy has to make choice between the alternatives uses of the
given resources.

15. RESOURCES Vs. HUMAN WANTS
 Features of resources :
 They are scarce, i.e. their supply is limited in relation to demand.
 They have alternative uses.
 Features of Human wants :
 They are unlimited, i.e. they can never be fully satisfied.
 They differ in priorities.

16. CENTRAL PROBLEMS OF AN
ECONOMY
Central problems, that are faced by every economy :
This problems are called central problems because these are the most basic
problem of an economy and all other problems revolve around them.

17. WHAT TO PRODUCE ?
This problem involves selection of goods and services to be produced
and the quantity to be produced of each selected commodity.
On the basis of the importance of various goods, an economy has to
decide which goods should be produced and in what quantities.

18. THE PROBLEM “WHAT TO PRODUCE” HAS
TO TWO ASPECTS :
WHAT POSSIBLE COMMODITIES TO PRODUCE : An economy has to
decide, which consumer goods( rice, wheat, cloths, etc. ) and which of the
capital goods( machinery, equipment, etc. ) are to be produced. In same
way, economy has to make a choice between civil goods( bread, butter,
etc. ) and war goods( guns, tanks, etc. ).
• HOW MUCH TO PRODUCE : After deciding the goods to be produced,
economy has to decide the quantity of each commodity, that is selected.
It means, it involves a decision regarding the quantity t be produced, of
consumer and capital goods, civil and war goods and so on.

19. REAL LIFE EXAMPLES OF WHAT TO
PRODUCE
 Pm Modi flag off first-ever driver less train service in our India :
On 28th Dec PM Modi has decided to flag off driverless train.
 TN Chief Minister announces Rs 2,500 cash, Pongal gift kit :
The distribution of the cash and kit would commence on
January 4, Palaniswami said on Saturday.
 Tamil Nadu launches mini-clinics to provide essential healthcare services for poor :
Palaniswami on Monday launched a project to set up 2,000 mini-
clinics across the state to provide essential healthcare services to the downtrodden.

20. HOW TO PRODUCE ?
This problem refers to selection of techniques to be used for production of goods and services.
Generally, techniques are classified as :
1. Labour intensive technique (LIT)
2. Capital intensive techniques (CIT)
• In Labour intensive technique, more labour and less capital ( in the form of machines, etc.) is used
• In Capital intensive techniques, there is more capital and less labour utilization.

21. FOR WHOM TO PRODUCE ?
This problem relates to the distribution of produced goods and services among the individuals
within the economy, i.e. selection of the category of people who will ultimately consume the
goods, i.e. whether to produce goods for more poor and less rich or more rich or less poor.
This problem can be categories under two main heads :
i. Personal distribution : It means how national income of an economy is distributed among
different groups of people.
ii. Functional distribution : It involves deciding the share of different factors of production in
the total national product of the country.

22. SOLUTIONS TO THE BASIC
PROBLEMS
• The basic problems of an economy can be solved either by the decisions of the Government
or by the Market through interactions of buyers and sellers.
• The Centrally Planned or Socialist Economy
• Here the government or the central authority plans all the important activities.
(production, distribution, exchange etc.).
• The government will try to distribute those resources which are useful to the society.
• For example: If services such as public health or basic education will benefit the society, the
government will make such goods or services available.

23. Summary
• Economy is the system which provides people means to work, earn and living.
• Economic activities are : Production, Consumption and Investment.
• Scarcity is refers to limitation in supply in relation its demand for that commodity.
• Scarcity not only the problem, resources which are limited are having alternative use.
• Economic problems is a problem of choice involving satisfaction of unlimited wants
out of limited resources having alternative uses
• Reasons for Economic problem : Scarcity of resources, Unlimited wants of Human
wants and Alternative uses.
• Central problems of an Economy : What to produce ?
How to produce ?
For whom to produce ?