Problems of an Economy

Introduction

Economic Problem is essentially a problem arising out of unlimited wants but limited resources which can be put to alternative use. There are various causes of economic problems like the unlimited nature of wants and the differences in their urgency, scarcity of resources and their alternative uses.

Economic Activities are those activities that are concerned with earning and spending money in exchange of either goods or services. Whereas Non-economic activities are activities carried for self satisfaction. They do not generate income. Factors of production are defined as the productive resources in an economy. According to Benham, “Anything, which helps in the process of production, is known as factors of production. There are four factors of production namely, land, labour capital and entrepreneur or organisation. These factors of production are used by the producers in the economy. Producers are said to be the drivers of production process. There are three kinds of producers in an economy: Primary producers (engaged in activities like agriculture, etc.), secondary producers (engaged in small and large scale production of industrial goods) and tertiary producers (provide services like transportation, banking , etc.) There are three major problems of an economy, What to produce: deals with the decisions regarding which commodities and in what quantities should be produced in the economy. How to produce: deals with the techniques of production. And For whom to produce: is the problem of distribution of the produced goods and services. Some other problems of an economy include problem of full and efficient utilization of resources and problem of economic growth.

The economic problems are solved differently in different economic set ups. In a capitalist economy, they are solved through Price Mechanism. In a socialist economy it is solved through the planning of the central planning authority and in a mixed economy they are solved by both using price Mechanism and central planning authority. These mechanisms have their own benefits and limitations.

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  • Q1

    Consider the following statements and identify the Wrong one.

    Marks:1
    Answer:

    Level of technical knowledge answers the question of “For Whom to produce?”

    Explanation:

    Level of technical knowledge answers the question of “how to produce?”. Different economies choose different techniques of production to achieve Efficiency.

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  • Q2

    ____________ producers are those producers, who are engaged in the small and large scale production of industrial goods.

    Marks:1
    Answer:

    Secondary

    Explanation:

    Secondary producers are those producers, who are engaged in the small and large scale production of industrial goods. Their activities are also called industrial and manufacturing activities.

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  • Q3

    “Natural wealth that helps in production process” is known as ___________.

    Marks:1
    Answer:

    Land

    Explanation:

    Land is known as the natural wealth that helps in production process. Land is considered as a Factors of Production which is used to produce goods and services which is used to satisfy human wants.

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  • Q4

    The problem “What to Produce” means…

    Marks:1
    Answer:

    Both (a) and (b)

    Explanation:

    Resources are limited, thus every economy has to decide what commodities are to be produced and in what quantities.

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  • Q5

    ____________ is not the central problem of the economy.

    Marks:1
    Answer:

    "When to produce?"

    Explanation:

    When to Produce is not a central problem of economy. The compulsion of making choices before societies is referred to as ‘central problems’. Three central problems are as follows:
    (i) What to Produce?
    (ii) How to Produce?
    (iii) For whom to Produce?

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