what are the three central problems of an economic? explain in detail.....?

Central problems of an economy: The central problems of an economy basically relate to the production of commodities, utilization of available resources in the production of commodities, and distribution of commodities produced in an economy.

All the problems centre around the concept of production. By production we mean creation of utility. It includes all those activities that create a product or service or any other object that helps satisfy some wants of an individual or a group.

Problem of resource allocation is the need to economise the use of resources. By economizing the use of resources we mean that the available resources should be allocated among the different uses in such a way that the resources are put to their best possible use.

Problem of resource allocation in an economy assumes the following three forms :

1. what to produce ?
2. how to produce ?
3. for whom to produce?

 What to produce ?. This problem is in fact the problem of allocation of scarce resources among different competing uses.

Lets assume that an economy can produce only two goods – say color TV sets and computers for industry – with the help of the given resources. If this economy decides to use the whole of the resources in the production of CTVs, it cannot produce any computers; similarly if whole of the resources are devoted to the production of computers, it will not be in a position to produce any CTVs. Another possibility is that it devotes a part of the resources to the production of CTVs and a part to the production of computers.

Choice between capital-goods and consumer-goods – We can also classify the various goods into 2 categories as capital goods and consumer goods. Let us assume that with the help of the given capital, an economy can produce more of capital goods like iron and steel, cement, etc. , or alternatively the same capital can go into the production of consumer goods like  cloth, sugar and furniture.

How to produce ? This is another related problem that an economy is faced with. This essentially is the problem of the choice of technique.  The two broad categories of production techniques can identified as labour-intensive technique and capital-intensive technique.

A choice in favour of labor-intensive technique would mean that the economy chooses to make better use of its available manpower; a choice in favor of capital-intensive technique implies that an economy is anxious to build up fast the infrastructure required for rapid economic growth.

For Whom to produce ? This is essentially the problem of distribution of income between (a) the different groups of the society, and (b) the present and the future.

As to income distribution between the different groups within a society an economy has to find ways and means to get a distribution of income which promotes social welfare.

The second related problem is the problem of choice between the present and the future. If the economy has decided to produce capital goods with the help of capital intensive technique of production, it implies that the society has chosen to produce for future generations rather than for the present generations, because building up of capital stock of the economy implies more production in future than at present. Conversely, larger production of consumer goods reveals society's preference for the present consumption to the future consumption.

'What', 'How' and 'For whom' are the three basic crucial questions. Every economic system, be it a capitalist or a mixed economy, has to find an answer to these questions.

the three major problems of an economy is what to produce, how to produce and for whom to produce