question_answer

Why do central problems of an economy arise? Explain the central problem of ?for whom to produce??

Answer:

Central problems: The problem of making choices among alternative uses of resources is called central problems of the economy. Scarcity of resources having alternative uses in relation to unlimited wants has given rise to central problem.

Main causes of central problems are:

(1) Unlimited wants.

(2) Limited resources.

(3) Alternative uses of resources.

For whom to produce: This is the third problem of allocation of resources. It is related to distribution of income. This problem refers to the decision regarding the share of different factors of production in the national product of the country. Goods and services are produced for the people who can purchase them, and purchasing power depends upon. Their income. We know that the output in an economy is the result of the combined efforts of various factors of production. Hence, the output should be distributed or how the shares of different factors of production should be determined. Thus, this problem is basically the problem of distribution of income and wealth in the society.

In case of capitalistic economy the decision is taken on the basis of the purchasing power of the consumers. Socialist economy takes decision regarding goods or services to be produced on the basis of the requirements of the individuals. Thus, this problem deals with the distribution of output among the people of a country.