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Chapter 2
Basic Economic Problems
Economics is the science of making choice under conditions of
scarcity. What are the basic issues about which choices are to be
made? Any society must make choices about three important problems.
They are
1. What to produce and in what quantities ?
Food or weapons; if so, in what quantities ?
Is it more food and less weapons or vice versa ?
2. How shall goods be produced?
Electricity from thermal power or from hydro power ?
3. For whom shall the goods be produced ?
A few rich and many poor or most people in modest comfort ?
These three basic problems are interdependent. The society must
make proper choice about them in order to meet the development
aspirations of people satisfactorily. The above three questions are
common to all economies but every economic system attempts to make
its own choice. The nature of a particular choice in a particular society
depends on its specific economic system.
Economic Systems
An economic system is a way of answering these basic questions.
Different economic systems answer the above questions differently. An
economic system refers to how the different economic elements will
solve the central problems of an economy: what, how and for whom to
produce. It refers to the production and distribution of goods and services
within which economic activity takes place. It refers to the way different
economic elements, individual workers and managers, productive
organization such as factories or firms and government agencies are
linked together to form an organic whole.