Introduction of Micro-Economics — Economics STD 12 Humanities & Commerce — Question

Every economy faces three central problems due to multiplicity of wants, scarce availability of resources and problems of choice. This scarcity challenges the best possible usage of these available resources to fulfil the unlimited demands. The three central problems of an economy are as follows:

1. Problems of allocation of resources.
2. Problems of full and efficient utilisation of resources.
3. Problems of growth of resources.

1. Problems of allocation of resouces: Every economy has limited resources which can alternatively be used for producing different goods and services. Every economy has to face three problems which we call allocation of resources.

• What to produce and in what quantities: It is the problem of choosing the different items of goods and the quantities to produce with the available resources. The very first problem encountered by any economy is to decide what goods are to be produced and in what quantities or amount with the limited resources. There is a lot to be decided, whether to produce consumer goods or capital goods, agricultural goods or investment goods, whether to cater education and health care sector or to strengthen country’s military. An appropriate example was set by the Latin American nation Costa Rica, they dismantled their military in 1949 and invested the money, which earlier was spent on the maintenance of their army, on education and healthcare.

Once it is decided, what to produce, the next decision is to estimate the amount or quantity of the production. For e.g if an economy decides to produce more of wheat and cloth within a given period of time,then it will have to produce less of machines due to the limited resources available.

So the economy constantly struggles to choose what to produce and in what quantities.

• How to produce: This problem relates to the choice of technique i.e. labour intensive or capital intensive. For example production of cloth is possible either by handloom or by the use of modern machines. In labour intensive technique, proportion of labour is more (eg prodution by handloom) and capital is less. With this technique, more employment can be generated.

In capital intensive technique, proportion of capital (eg production by machinery) is more and labour is less. It produces goods on large scale using high technology. An economy should adapt that technique which gives efficient production at minimum cost and best use of scarce resources.

Developed countries use capital intensive techniques whereas developing countries use labour intensive techniques.

• For whom to produce: This problem refers to selection of category of people who will ultimately consume the goods i.e., the distribution of final goods and services.

It is the problem of deciding whether to produce for low income group or high income group. It depends on the level and distribution of income and wealth.The objective behind selecting such mechanism is to reduce inequality of income, to reduce poverty and to add to the social welfare and standard of living of people.

This problem can be categorised under two main heads:

1. Personal Distribution: It means how national income of an economy is distributed among different groups of people.
2. Functional Distribution: It involves deciding the share of different factors of production in the total national product of the country.

2. Problem of efficient and full utilisation of resources: Next problem with the economy is how to use its limited resources i.e., land, labour, capital and other resources so that maximum production at least cost can be produced.

If the resources are fully utilised, it will mean unemployment or underemployment of resources i.e., wastage of natural and human resources.

3. Problem of growth of resources: Growth of resources has become a basic problem as the resources are scarce and they will have possibility of being exhausted after a continuous use. This objective can be achieved by technological advancement. Under developed countries remain poor of poor growth of resources. Beside fuller utilisation, these countries shoul try to raise their productive capacities by exploring futher availability of resources and discovering better techniques for their use.