The Central Problems of an Economy

Because resources are scarce relative to unlimited wants, every economy — whatever its size or the economic system it follows — must answer three central questions. These are usually presented in the Maharashtra HSC Economics syllabus as the three basic (or central) economic problems:

1. What to produce and in what quantities? Since resources cannot produce everything wanted, an economy must decide the combination of goods and services to produce — for example, how much land and labour in Maharashtra should go toward growing sugarcane versus food grains, or how much of the state's budget should go toward building roads versus schools. Producing more of one good, given fixed resources, means producing less of another.

2. How to produce? For any given good, an economy must choose the technique of production — a labour-intensive technique (using relatively more labour and less machinery, common in small-scale and traditional Indian industry) or a capital-intensive technique (using relatively more machinery and less labour, common in large modern factories). The choice affects both the cost of production and the level of employment the economy generates.

3. For whom to produce? This is the problem of distribution — once goods are produced, who gets to consume them, and in what proportion? This depends on how income is distributed among the factors of production (wages to labour, rent to landowners, interest to capital, profit to entrepreneurs), and directly raises questions of equity and standard of living across different sections of society. …