Basic Problems o¢ An Economy 3.1. Introduction Any economy must take decisions regarding certain fundamental questions. These questions », related to the scarcity of economic resources and pattern of resource allocation in a society. Wem, consider in detail what these basic economic problems are. It is to this task that the present chap, is devoted. 3.2. The Central Task — Different Views Whatis the central task or the main function of an economic system ? Economists are divided ‘OM ths question. 3.2.1. Maximising the satisfaction of human wants One group of economists is of the opinion that the main economic problem is to transform society: resources into consumable commodities by the use of productive technology. It is not an ei problem to solve. Because man’s wants are unlimited. So his thirst for consumption is also unlimite In comparison, society's resources are limited. According to these economists, the central econom task is to decide how much of which commodities are to be produced for the maximal satisfaction man’s wants. 3.2.2. Accomplishing main economic activities Marxian economists think that the interests of different social classes are always in conflict. Thema conflict is between the proletariat and the capitalists or the bourgeoisie. These two main classesaz however, divided into subclasses. Among the capitalists there are small, medium and big ones. Als between the workers and the capitalists, there is the middle class. The function of the econo system is to accomplish the main economic activities (production, distribution, etc.) through mutual interaction of the conflicting interests of different social groups. Maximising human satisfacti by the use of the society’s limited resources is an inadequate description of the functions ofth economic system. In any country, at any time, there is always a class (or subclass) that has controll authority on the economy. The economic system of the country then caters to the interests of this cs It is wrong to say that the economic system tries to ensure the maximal satisfaction of the wants oll! the social classes. 3.2.3, Economic problem From the above discussion it becomes clear that the main economic problems faced by every S04) are : 2 (1) Unlimited human wants, wth (2) Limited availability of resources to satisfy those wants, and (3) Fulfilment of unlimited wants with limited resources. wieBasic Problems of an Economy ly, human wants are unlimited. If one want is satisfied, the other appears soon. For basic needs of human being (e.g, food, clothing and shelter) are satisfied then some ds appear very soon. These secondary needs may be social needs, i.e., need for Roclal function, need for fulfilling some social obligations, etc. However, in comparison limited human wants, the resources required to satisfy such wants remain limited. in problem before any society is to satisfy the unlimited wants with limited resources. the problem of choice or selection. It implies that every society has to arrange its ts in order of priority, Then, with its limited resources, the society has to satisfy the ts in order of priority, 18 behind economic problems ; Scarcity and Choice uuses behind the economic problems of any society are : ited human wants : Every human being requires varieties of goods and services for ining and improving his or her standard of living. Whenever the basic needs of food, g and shelter are fulfilled then the people feel that they ‘want’ and ‘need’ education, book, d pencil, eraser, chair, table, television, tape recorder, CD-player, computer, travel, sports, lothes, washing machine, and thousands of such items. In a modern society, these wants eased further in response to the pressures of fashion and advertising. These wants ‘one ofter another like untiring waves of the sea, ity of resources for satisfying these wants : Production of various goods and services resources like land resources, mineral resources, forest resources, physical capital (e.g., es, factory sheds, etc.) and money capital, human resources (e.g,, skilled man power), etc. er, compared to the unlimited wants for various goods and services, these resources to be insufficient. It implies that even if all these available resources are fully employed for ing various goods and services, only a small part of human wants can be satisfied. So, sity of resources is an important reason behind the economic problem in any society. main economic questions times, economists have analysed economic systems from a broad perspective. These economists talk about three main economic problems : (1) What to produce ; (2) How to ind (3) For whom to produce. In short, these are called the ‘What, How and for Whom’ it to produce ? first question that any economic system must answer is : What goods and services are to be d in a society and in what quantities ? estion arises from the fact that human wants are unlimited, while resources are limited. The tion of human wants requires the consumption of goods and services. Human beings, ,, wish to consume goods and services. But, since resources are limited, the economic system produce all types of goods and services. Even any particular good or service cannot be ced in an infinitely large quantity. Only finite amounts of a limited number of goods and services produced. Therefore, there arises this decision problem. The economy must decide which and services to produce and which goods and services to exclude from production. that the root of the questions is the fact that society's resources are limited. If society had ited resources, it would have been possible to produce all possible types of goods and services ited quantities. What to produce and what not to produce would not have been an important then. If, after producing a good in a large amount, it was seen that people did not wish to \e it or they did not wish to consume it in such huge quantities, the surplus output could just away. The question of wastage would not arise because society's resources were unlimited.Because of the limitation of resourc ‘annot be done. The economy must choose its plan carefully. Everything cannot be produced and even those things which are produ Produc. ating produced in unlimited quantities 3.3.1. Which goods to produce and in what quantity The ‘what to produce’ question can be divided into two different sub-questions ; (1) Whi and services should be produced ? (2) Supposing that a particula: ice ct aaa ee areant should $s Pre ANGE gegen t mautblee 30 4 yer service is to be prodee® These two sub-questions are merely two aspects of the same question tI 4 Because, the basic problem is to fix the amounts of aaa of all Need sehen hae every good or service society must decide the amount of its output. If it is decided that tee by of output of a particular good or service is zero, then it means that this particular good or not to’ be produced at all. Only those goods and services whose amounts of output are fer positive levels, are to be produced. Thus, it is possible to say that the basic task is to ee : Sppropriate level of output for every good and service. If this decision problem is solved, then ba the sub-questions (What to produce’ and ‘How much to produce’) are answered onan ‘what’ and the ‘how much’ questions are, therefore, considered to be essentially the same quest = 3.3.2. Wants and resources are different in different countries ia) Differences in the pattern of human wants : This basic question of ‘what to produce’ does no. have any fixed answer. The pattern of wants differ widely between countries. This pattern is determined by a wide variety of historical, geographical and cultural factors. For instance, the type of food items wanted by people is different in different countries. People in countries of the tropical regions of the world want to consume rice, wheat, pulses, etc. They do not demand mezt in very large quantities. The opposite is the case in countries with cold climates. Similary, different types of clothing, housing, etc. are demanded by consumers in different parts of the world. (b) Differences in resources: On the other hand, there are differences in the pattern of resources also. A country may be rich in mineral resources. It will be able to produce those goods and services which can be produced with the help of such resources, The specific types of goods and services require the use of specific types of inputs. Whether a country is in a position to use the inputs required for the production of a particular good will obviously depend on the kinds of resoures available in the country. Le Differences in the quantity of production : In some cases, different countries may wish produce the same goods and services. But even then there may be differences in the quant which these are produced. Again, this difference may be due to either a difference in the of wants or a difference in the pattern of resource availability. For instance, two countries,. B, may be such that in both of them people prefer rice to meat, but it may be that the e for rice over meat is stronger in A than in B. In this case, both A and Bwill produce more rice t meat but A will tend to produce rice in greater quantities than B, Similarly, both A and B have the resources to produce motorcars, but A may have these resources in greater. Then both will produce motorcars (provided that consumers want cars), produce more cars than B, Thus, the ‘what to produce’ question is answered ferent countries, In the real world we see that different countries produce different, services or the same goods and services in different quantities. }. How to produce ? second basic problem that every economy must solve is that of deciding haw to produce rvices (that the economy has decided to produce), A particular quantity of a particular, ~> Basic Problems of an Economy be prociuced in many different ways. The economy must choose a particular way of Spevitied amount of the good, Moreover, this must be done for each of the different fices that the economy wants to produce: of techniques, ge of the economists, « particular way of producing a particular good or service (or a set services) is called a technique of production. For instance, in some cases, a particular @ particular good can be produced by different combinations of inputs. Thus, it may be ‘of wheat can be produced either on 2 hectares of land by 5 agricultural workers or on 4 ‘of land by 2 workers, Here, there are two techniques for producing 10 tons of wheat = of land, 5 workers) and (4 hectares of land, 2 workers). An economy which has decided to 10 tons of wheat nwust choose between these two techniques, There is a similar problem for od (or every set of goods), Therefore, the question ‘how to produce’ is also known as the determining the solution to the problem : How to produce s problem depend ? We can point out two factors : of all, the answer to the question ‘How to produce’ (ie, s to use for producing the different goods and services) obviously depends on Jevel of technical knowledge available to society. An agricultural crop can be produced with help of primitive methods of cultivation or with the help of more advanced and more ficient methods of cultivation. However, the advanced method must be known to the society. ‘Thus, technical knowledge available to the economy is one of the factors affecting the economy's decision regarding ‘how to produce’. This is why we see that different countries may decide to ‘use different techniques to produce the same commodity or commodities. Different economies choose techniques of production from different available sets of techniques. Availability of resources : The other factor affecting the answer to the question ‘how to produce’ is the availability of resources. Take for instance, the example regarding the production of 10 tons of wheat given above. Ifit is a large country with a relatively small population, land will be a relatively abundant factor and labour will be relatively scarce. The country will, therefore, choose to produce the wheat with the help of 4 hectares of land and 2 workers (rather than with the help of 2 hectares of land and 5 workers). On the other hand, ina country which has a large population relative to the amount of land available, labour will be the abundant factor. and land ‘will be scarce. It will, therefore, choose 2 hectares of land and 5 workers as the appropriate technique for producing 10 tons of wheat. In this way, the relative availabilities of the different resources (or inputs) or the prices of those inputs affect an economy's answer to the question ‘how to now that the first two basic problems have been solved i.e., the economy has decided the ts of production of various goods and services and has also chosen the appropriate techniques Producing them. There still remains the problem of deciding the manner in which the produced ‘members of society, who will receive how much of the produced commodities ? In other words, after the commodities have been produced, there remains the task of deciding how they will be distributed. Who will get (to consume) the produced commodities ? This is known as the question : ‘For whom to Produce ?' Tt is also known as the problem of distribution.Principles of Economics # Vol. « 1 (For ISC Classext) 3.5.1. Various ways of Solving the problem : For whom to produce (a) Solution through Government decisions : The problem of distribution can be yoy Ways. An overall authority (for example, the ‘overnment othe planners) can diet of distribution, i, {t can directly order that so much of the produced outnay individual A, 9 much will go to individual B, ete, (b) Solution through social custome ; Another way of solving the problem would matter to exinting conventions, social customs, etc, This is the method in which thy | solved in primitive societies, For instance, in such a society it may be the custom thag 4, Mn, the chief of the tribe will get one-third of the total output of all goods, the priests yA one-fifth, ete, Oy (€) Solution through market mechanism : In modern societies the problem is 8olved, at joy, 7 by the working of the market mechanism (i.e,, the price mechanism determined ye forces of demand and supply in the markets). It determines not only the prices of the Prog Ing 00d and services but also the prices of all factors of production. Neng The problem of ensuring equity Everybody agrees that the distribution problem should be solved in an equitable manne, should not be too much inequality among the members of the society so far as their satay wants (i.¢,, their consumption ) is concerned. It should not happen that most of the prod 4 and services go to a handful of people, while the vast majority of the population of the county ‘only a small part of the total production. La (a) Equity does not mean equal consumption by all members of the society : However, how equal the distribution of the produced goods should be, is a difficult question to ang, Should the total production be exactly equally divided ? That does not seem to be fair, bec, then a diligent and honest member of the society will consume the same amount of, services as a lazy or dishonest fellow. Honesty and hard work should be rewarded by the honest and hard-workers to consume more than the others. Thus, while equity in distribuie is desirable, it should not be pushed to the extreme point of exactly equal consumption by members of the society, irrespective of their work effort, honesty, need, etc, Equity means equal opportunity to consume the minimum necessities of life : Exactly wy degree of equality is desirable is a matter, which must be left to society or the economy. Inreiiy, we see different degrees of equality in different economies and at different times. In a moder society, everybody agrees that all members of the society should, at least, get the opportunity consume the minimum quantity of goods and services necessary for living a healthy life, Fron the above discussion, we are now familiar with the main economic problems before any economy. 3.6. General framework Professor Paul Samuelson 1s a leading figure among those economists who have working of the economic system through these three questions. According to Sami functions of an economic system are to answer these three questions.problems using production possibility curve cept of the production possibility curve to explain the economic em of a society duction possibility curve is the locus of all such combinations of two commodities which can be juced in a country with its given resources and technology. In Fig.-1, PpP’g is the production + possibility curve of a country. It shows different combinations of paddy (X) and natural rubber (Y) which the country can produce with its available resources and technology. It can choose any such combination like N or T which lies on this curve. (a) Limited resource : Here, the combination point N shows OY, amount of natural rubber and 0X amount of paddy. Again, the combination point T shows OY \ amount of natural rubber and 0X, amount of paddy. Thus, point N shows relatively higher amount of natural rubber as compared to point T. It implies that if the country wants to produce more of paddy, it has \ to reduce the production of natural rubber. This shows ale the limited availability of natural resources. Due to Py PX this reason, the country connot choose any such (Paddy) combination like ‘H’ which lies beyond the production possibility curve. The problem of ‘what to produce and in what quantity’ : This curve also reflects the problem of what to produce’. If the country uses all of its resources for the production of only natural rubber then the maximum possible production of natural rubber will be OP, In that case, there will be no production of paddy. Fig1 similarly, if the country uses all of its resources for the production of paddy then, the maximum. possible production of paddy will be OP’. But in that case, the production of natural rubber will be zero. Efficient utilisation of available resources : If the country chooses the combination point M, ie., ifit produces OX, of paddy and OY, of natural rubber then it would indicate inefficient utilisation of resources, Here, the country can increase the production of paddy from 0X, to 0X, by keeping the production of natural rubber unchanged at OY, (ie., the country can move from point M to 7), Similarly, in this situation, the country can also increase the production of natural rubber from OY, to OY, by keeping the production of paddy unchanged at OX, (ie., the country can move from point M to N.) Thus, if the country chooses any combination of X and Y on the production possibility curve, it implies efficient utilisation of available resources. However, if it chooses any combination that lies below that curve, it would indicate inefficient utilisation or underutilisation of resources. Improvement in technology and increase in the amount of resources : If new resources are available or if the level of technology is improved (e.g,, application of high-yielding varieties of seeds, better methods of cultivation, better irrigational facilities, etc.) then the whole production Possibility curve will shift outward. This is shown by P, P’, curve in Fig.-1. In that case, the “ountry can produce more of both X and Y commodities. 3 ‘Reeasing opportunity cost : In Fig | it is also observed that if the production of paddy is sed then for each additional increment, the country has to sacrifice more and more of (d) fe)