HOW TO SOLVE CENTRAL PROBLEMS OF ECONOMY?

 Central problem is the problem of choice. The different types of economies solve their central problems as follows:-

1. Market Economy:Market economyis also termed as free economy in which there is no intereference of the government. In this type of economy the decision making is doneby theprinciple of pricemechanism which is done on the basis of market forces of demand and supply. The production activity is carried out with the objective of profit maximisation.Consumption is carried out with the objective ofmaximum satisfaction. Similarly, the decision of technique of production is based on the least cost combination.
2.  Centrally Planned Economy: Ina centrally planned economy, all economic activities are decided by Central Planning Authority or the Government. It is the Government/planning Authority which has to decideabout allocation of resources formanufacturing, agriculture, defenceetc.Government decides what to produce, how to prioduce and for whom to produce.Social welfare is the prime consideration behind allocation of resources.
3.  Mixed Economy: Inthis type of economy characteristics of both the above mentioned economies exist i.e. decisions regarding what, how and for whom to produce are taken on the basis of price mechanism as well as on the basis of social considerations. Important decisions relating to vital commodities of national interest are undertaken by the government and all other decisions are left to the market mechanism with little or no interferenceof the government.

Every economy faces three central problems due to scarce availability of resources. 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

What to produce and in what quantities?

The very first problem encountered by any economy is to decide what goods are to be produced and in what quantities or amount. There is a lot to be decided; whether to produce consumer goods or luxury goods; agricultural goods or investment goods; whether to cater education and healthcare 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. So the economy constantly struggles to choose what to produce and in what quantities.

How to produce?

The second problem that arrives is how to harvest the given or available resources? That is, what technique is to be used for producing various goods and services? It depends majorly on the nation’s endowment of resources in deciding the optimum technique. It has to be decided whether efficient production is possible through labour-intensive or capital-intensive techniques. This decision rest on the present economic conditions and also that the selected technique shall not only reduce the cost of production but also add to the social and economic welfare. For example, if a country is facing wide unemployment possibly due to huge population, then it is wise to opt for labour-intensive technique so that there is reduction in unemployment.

For whom to produce?

Finally, the purposeful distribution of final goods and services produced (national income) has to be done; that is, who gets what and how much? The economy needs to decide the best suitable mechanism for distribution of the final products among different segments of the society. 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.

i m not asking problem i m asking for ways to solve this problems if u know then plz answer.

antima's answer is correct devika

1. Market Economy:Market economyis also termed as free economy in which there is no intereference of the government. In this type of economy the decision making is doneby theprinciple of pricemechanism which is done on the basis of market forces of demand and supply. The production activity is carried out with the objective of profit maximisation.Consumption is carried out with the objective ofmaximum satisfaction. Similarly, the decision of technique of production is based on the least cost combination.
2. Centrally Planned Economy: Ina centrally planned economy, all economic activities are decided by Central Planning Authority or the Government. It is the Government/planning Authority which has to decideabout allocation of resources formanufacturing, agriculture, defenceetc.Government decides what to produce, how to prioduce and for whom to produce.Social welfare is the prime consideration behind allocation of resources.
3. Mixed Economy: Inthis type of economy characteristics of both the above mentioned economies exist i.e. decisions regarding what, how and for whom to produce are taken on the basis of price mechanism as well as on the basis of social considerations. Important decisions relating to vital commodities of national interest are undertaken by the government and all other decisions are left to the market mechanism with little or no interferenceof the government.

this is by meritnation expert