Central Problems of An Economy

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The main cause of economic problems is scarcity of resources. Human wants are unlimited, but resources are limited, so every economy must decide how to use them carefully.

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Choice arises because resources are scarce and can be used in many alternative ways. Since one resource cannot satisfy all wants at the same time, people and economies must decide what to choose.

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The three fundamental economic problems are: what goods and services to produce, how to produce them, and for whom to produce them. These are the basic allocation problems of every economy.

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This problem asks an economy to choose which goods to produce and how much of each to produce. Since resources are limited, not all goods can be produced in unlimited quantities.

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It means deciding the method of production. The economy must choose the best way to produce goods using available resources such as labour, land, capital, and technology.

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A labour intensive method of production is a method in which more labour and less machinery are used. It is one way of producing goods when labour is used more heavily than capital.

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A capital intensive method of production is a method in which more machinery and less labour are used. It depends more on capital than on labour.

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It means deciding who will get the goods and services produced in the economy. Because not everyone can get everything, society must decide whose needs and wants will be satisfied first.