Problems of an Economy


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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