CENTRAL PROBLEMS OF EVERY ECONOMIC

ORGANISATION

FUNDAMENTAL PROBLEMSAs resources are limited; therefore, every

society confronts three fundamental and interdependent economic problems:-

1. What to produce and how much? Wheat or rice? Potatoes or sugarcane? Guns or milk?

2. How to produce? What resources and in what technological manner to produce? For e.g. electricity from which sources, waterfall, coal, nuclear, wind, sun, etc

3. For whom to produce? Who’d enjoy the usage of goods? For e.g. how national income will be distributed? Who’d have more income to buy goods and who’d have less?

• A system of prices, markets, profits and losses, incentives and rewards determine: what, how and for whom.–Firms produce the goods that yield the highest profits

(the what).–Those techniques are used, which are least costly (the

how).–Prices of factors of production, i.e. rent, wages &

profits determine for whom to produce (the for whom).

HOW TO SOLVE THE FUNDAMENTAL PROBLEMS?

Though problems are the same for all societies, yet different societies try to solve these in different way:-•Market makes most of the decisions,

where individuals and enterprises voluntarily agree to exchange goods and services.• The government makes most economic

decisions – economic commands from the top to further down.

MARKET ECONOMY

• In USA, EU, Japan, ASEAN, etc, individuals and private firms make the major decisions about production and consumption.• Laissez – Faire Economy

COMMAND ECONOMY

• The governments own and run the operations of enterprises.• Thus the governments decided which goods and

services ought to be produced (the what).• Methods of production and techniques of doing

one’s job was decided by the state (the how).• Governments decided the prices of various factors

of production (the for whom).

MIXED ECONOMY

In between market and command, there’s mixed economy•What is a mixed economy?

• Are all societies mixed economies? If so, how?

MIXED ECONOMY

Salient Features of a Mixed Economy:-• While many economic decisions are made by the

market forces; yet governments play an important role in overseeing the functioning of the market.• Governments make laws/policies to regulate

their economies. Ex: Tax, Custom Duties, Monetary Policies.• Provide those goods and services, that are not

or cannot be left for private enterprises to produce. Examples?

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed.

SOCIETY’S TECHNOLOGICAL POSSIBILITIES

• Each economy has a stock of limited resources, like labour, factories, money, etc.• In deciding about “what” and “how”, the society

makes a choice among different alternative ways of allocating resources.• How much land be used for wheat crop? How

many army brigades, fighter squadrons or naval ships be available to ensure national defence? How much resources are needed to provide free education for all children upto secondary level?

SOCIETY’S TECHNOLOGICAL POSSIBILITIES

• Every society knows that goods or resources are scarce and everybody can’t get everything.• Thus, it must decide how to cope with limited

resources.• It must choose among different packages of goods

(the what)• It must also select from different techniques of

production (the how).• And, the society must decide which factor of

production will get how much (the for whom).

THE PRODUCTION POSSIBILITIES FRONTIER

• Every kid learns early in life that he or she can’t eat his or her ice cream and have any other thing also in limited budget.

• Similarly societies learn that their urge to achieve higher standards of life is restricted by the resources and the technology available.

• Let’s assume that we can produce only two economic goods, guns and wheat.

• Again assume that all resources are used to produce only guns and 15,000 guns are produced with the existing resources & technology.

• On other extreme, let’s assume that only wheat is produced and 5 mill tons of wheat is produced.

QUESTIONS?