Central economic problem

Managerial economics

1. Central economic problem Umamaheswari

2. Titled

3. 3 Central Problems that are faced by every Economy of a Country It leads to following Central Problems that are faced by every economy: 1. What to produce? 2. How to produce? 3. For whom to produce? These problems are called central problems because these are the most basic problems of an economy and all other problems revolve around them.

4. Allocation of Resources (Studied under Microeconomics Allocation of resources refers to the problem of assigning the scarce resources in such a manner so that maximum wants of the society are fulfilled. As resources are limited in relation to the unlimited wants, it is important to economize their use and utilize them in the most efficient manner.

5. Problems in allocation of resources The problem of allocation of resources is studied under 3 heads: (1) What to produce; (2) How to produce; (3) For whom to produce. In nutshell, an economy has to allocate its resources and choose from different potential bundles of goods (What to produce), select from different techniques of production (How to produce), and decide in the end, who will consume the goods (For whom to produce).

6.  What to Produce: This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity. Every economy has limited resources and thus, cannot produce all the goods. More of one good or service usually means less of others.

7. eg For example, production of more sugar is possible only by reducing the production of other goods. Production of more war goods is possible only by reducing the production of civil goods. So, on the basis of the importance of various goods, an economy has to decide which goods should be produced and in what quantities. This is a problem of allocation of resources among different goods.

8. The problem of ‘What to produce’ has two aspects: ( i ) What possible commodities to produce: An economy has to decide, which consumer goods (rice, wheat, clothes, etc.) and which of the capital goods (machinery, equipment’s, etc.) are to be produced. In the same way, economy has to make a choice between civil goods (bread, butter, etc.) and war goods (guns, tanks, etc.). (ii) How much to produce: After deciding the goods to be produced, economy has to decide the quantity of each commodity that is selected. It means, if involves a decision regarding the quantity to be produced, of consumer and capital goods, civil and war goods and so on

9. How to Produce: This problem refers to selection of technique to be used for production of goods and services. A good can be produced using different techniques of production. By ‘technique’, we mean which particular combination of inputs to be used. Generally, techniques are classified as: Labour intensive techniques (LIT) and Capital intensive techniques (CIT).

10. types i . In Labour intensive technique, more labour and less capital (in the form of machines, etc.) is used. . In Capital intensive technique, there is more capital and less labour utilization.

11. eg For example, textiles can be produced either with a lot of labour and a little capital or with less labour and more capital. Availability of factors and their relative prices helps in determining the technique to be used. The selection of technique is made with a view to achieve the objective of raising the standard of living of people and to provide employment to everyone. For example, in India, LIT is preferred due to abundance of labour, whereas, countries like U.S.A., England, etc. prefer CIT due to shortage of labour and abundance of capital.

12. Guiding principle Guiding Principle of ‘How to Produce’: Combine factors of production in such a manner so that maximum output is produced at minimum cost, using least possible scarce resources.

13. . For Whom to Produce: This problem refers to selection of the category of people who will ultimately consume the goods, i.e. whether to produce goods for more poor and less rich or more rich and less poor. Since resources are scarce in every economy, no society can satisfy all the wants of its people. Thus, a problem of choice arises. Goods are produced for those people who have the paying capacity. The capacity of people to pay for goods depends upon their level of income. It means, this problem is concerned with distribution of income among the factors of production (land, labour, capital and enterprise), who contribute in the production process.

14. distribution i ) Personal Distribution: It means how national income of an economy is distributed among different groups of people. ii) Functional Distribution: It involves deciding the share of different factors of production in the total national product of the country. Guiding Principle of ‘For whom to Produce’: Ensure that urgent wants of each productive factor are fulfilled to the maximum possible extent.

15. Vilfredo Pareto Born in france Economics is basically a mathematical science. Engineer comes economist Worked in University of Lausanne Microeconomics and Socioeconomics He was the first to discover that income follows a pareto distribution Pareto principle is named after him for his observations of 80% of land in Italy is owned by 20% of the population. Contributed to the fields of Mathematics and sociology

16. Pareto efficiency  Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off. The Pareto frontier is the set of all Pareto efficient allocations, conventionally shown graphically. It also is variously known as the Pareto front or Pareto set. [1] A Pareto improvement is a change to a different allocation that makes at least one individual or preference criterion  better off  without making any other individual or preference criterion worse off, given a certain initial allocation of  goods  among a set of  individuals . An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made, in which case we are assumed to have reached Pareto optimality.

17. Pareto frontier

18. The problem of economic growth If productive capacity grows, an economy can produce progressively more goods, which raises the  standard of living . The increase in productive capacity of an economy is called  economic growth . There are various factors affecting economic growth. The problems of economic growth have been discussed by numerous growth models, including the  Harrod-Domar model , the neoclassical growth models of  Solow and Swan , and the Cambridge growth models of Kaldor and Joan Robinson. This part of the economic problem is studied in the economies of development. ]

19. Things comes under non pareto In principle, a change from a generally inefficient economic allocation to an efficient one is not necessarily considered to be a Pareto improvement. Even when there are overall gains in the economy, if a single agent is disadvantaged by the reallocation, the allocation is not Pareto optimal. For instance, if a change in economic policy eliminates a monopoly and that market subsequently becomes competitive, the gain to others may be large. However, since the monopolist is disadvantaged, this is not a Pareto improvement. In theory, if the gains to the economy are larger than the loss to the monopolist, the monopolist could be compensated for its loss while still leaving a net gain for others in the economy, allowing for a Pareto improvement.

20. Full employment Full employment  means that everyone who wants a job can have work hours they need on "fair wages". [1][2]  Because people switch jobs, full employment means a stable rate of  unemployment  around 1 to 2 per cent of the total workforce, but does not allow for  underemployment  where part-time workers cannot find hours they need for a decent living.  In  macroeconomics , full employment is sometimes defined as the level of employment at which there is no cyclical or  deficient-demand unemployment