An economic system or economy is a mechanism where the scarce resources are channelized . on priority to produce goods and services. These goods and services produced by all the sectors of the economy determine the national income.
Generally, human wants are unlimited and resources to satisfy them are limited. If there was a perfect match between human wants and availability of resources there would have been no scarcity, no problem of choice and no economic problems at all.
So, one has to select the most essential want to be satisfied with limited resources. In economics, this problem is called ’Problem of Choice’.
The problem of choice arising out of limited resources and unlimited wants is called economic problem. In every economy whether developed or underdeveloped, Capitalistic, Socialistic or Mixed economy, there will be three basic economic problems viz., What to produce, How to produce and For whom to produce. Let us discuss them in detail.
(a)What to Produce: Every country has to decide which goods are to be produced and in what quantities. Whether more guns should be produced or more foodgrains should be grown or whether more capital goods like machines, tools, etc., should be produced or more consumer goods (electrical goods, daily usable products etc.) will be produced. What goods to be produced and in what quantity depends on the economic system of.the country. In Socialistic economy, the Government decides and in Capitalistic economy market forces decide and in Mixed economy, both the Government and market forces provide solutions to this problem.
(b) How to Produce: There are various alternative techniques of producing a product. For example, cotton cloth can be produced with either handloom or power looms. Production of cloth with handloom requires more labour and production with power loom use of more machines and capital. It involves selection of technology to produce goods and services.
There are two types of techniques of production viz., (a) Labour intensive technology and (b) Capital intensive technology. The society has to decide whether production be based on labour intensive or capital intensive techniques. Obviously, the choice of technology would depend on the availability of different factors of production (land, labour, capital) and their relative prices (rent, wages, interest).
(c) For whom to produce: Another important decision with economy has to take is for whom to produce. The economy cannot satisfy all wants of an the people. Therefore, it has to decide who should get how much of the total output of goods and services. The society has to decide about the shares of different groups of people- poor, middle class and the rich, in the national output.
Apart from above, an economy also faces other problems: they are as follows:
(a) The problem of economic efficiency: The efficient utilisation of existing resources of an economy has also become a major problem. The Optimum use of both natural and human resources is needed to prevent the wastage of these resources.
(b) The problem of full employment: Full employment means utilisation of resources to the fullest extent. Under utilisation of human resources leads to unemployment, disguised unemployment etc. If the natural resources are not used to the maximum, there is a wastage of potentiality of an economy.
(c) The problem of economic growth: Every nation wants to increase its Gross Domestic Product to achieve economic growth. This in turn improves the standard of living and reduces poverty and unemployment. Every economy has to increase its ability to produce more goods and services with the help of existing resources in order to achieve economic growth. But many developing countries are facing this problem of economic growth. So, the above are the basic problems of an economy common to all the economic systems of the world.
