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Problems of an Economy
The ultimate truth about all economies is that their main functions are production, consumption, and growth. These functions are related to the available resources in the economy. Another aspect of all economies is that the resources of the economy are always limited, and they all have alternative resources. That is why the economies have some central problems.
If there were unlimited resources in an economy and the use of resources was for only one reason, no problems in an economy would have existed. But, since there is a limit on resources, all economies face some common problems. In fact, there are three central problems of all economies which are given below.
Problems of Economy
Problem 1: What to produce?
It is the most pertinent question of an economy. An economy always has some resources but their quantity is limited. Therefore, the economies must decide what to produce. Production requires the allocation of resources, and the economy must profit by producing a good.
If the good is unnecessary, producing it would only lead to a waste of time and resources. So, when an economy has some resources, it is its duty to determine what and how much of a certain commodity to produce.
For example, if a person has land, he must determine the purpose of using his land. He may use it for cultivation or build property on his land. If he chooses to cultivate he must determine what to cultivate and in the case, he wants to use the land for realty he must arrange enough funds for it.
Whatever the decision, the owner of resources must decide what to produce using their resources. Production must look for profit too. If producing a material leads to loss, the producer would be demotivated to produce that good. Therefore, while deciding what to produce the utility and profitability of using the good under production must also be considered.
Problem 2: How to produce?
Once the product is determined, the second problem of how to produce it must be solved.
For example, if a person decides to cultivate his land, he must determine whether he would use sophisticated machines for cultivation or he would do it manually.
How to produce is a very important problem because it decides the cost of production? If a person has enough capital, opting for a sophisticated process won’t be a problem. However, if there is a scarcity of funding, the producer must look for loans and alternative techniques that optimize the production process.
The problem of how to produce can also depend on technology.
For example, people used handlooms to produce cotton clothes before power or automatic looms were introduced. However, the advent of technology completely changed the production of clothes. Nowadays, thousands of cotton clothes can be made with the help of automatic looms in a day. In earlier days it would take enough days to create just one cloth. That is why how to produce is a very pertinent question.
In contemporary days, computers and information technology are used in almost all production and manufacturing processes. This not only reduces the production cost but also creates products that have fewer errors or defects. That is why the inclusion of technology is an option when how to produce problem is considered.
Problem 3: For whom to produce?
Most of the products produced in an economy cannot be shared with every economic member. As there is a scarcity of products in every economy, the producers must decide the distribution of goods and services among the members of the economy. The issues of storage and supply chains come due to this reason.
In modern societies, products with high costs or luxury items are meant for certain people. Marketers usually know in which market to sell the goods according to the prices of the products. Knowledge of the markets and consumers is, therefore, necessary to deal with the problem of whom to produce for.
This problem is also related to demand in markets. The producers usually want to sell products in markets where demand is maximum. Therefore, products are produced for markets that have the highest demand or where the possible profitability is maximum.
The nature of produced goods also determines the consumers of the products. The goods needed for a living must be made available for all while luxury items can be sold to select consumers. To keep the balance intact, governments usually play the role of intermediaries.
Why Addressing the Problems of the Economy is Important?
The problems of economies are not just a matter of information. They are the indicators of the direction an economy must move for maximum utilization of economic resources. By addressing the basic problems, the needful factors, such as demand in a market, efficient use of resources, and the overall well-being of societies can be ensured. That is why, the basic problems of economics are so important.
The first problem of an economy, what to produce and to what extent, shows the needful products that will be used by consumers. Not knowing the needed products or producing products that are not useful for the consumers may lead to waste of resources which can be mitigated by answering the first problem.
How to produce helps producers to choose the most productive manner to produce a good or service. It leads to maximum resource utilization which helps in reducing prices. A society gets the products at the lowest possible price when how to produce problem is handled efficiently.
Finally, for whom to produce offers the idea of the consumers of a product. By knowing the consumers, the producers can build more suitable products that become useful for the consumers. It helps in making products that bring the most value to consumers.
The problems of economies are very pertinent issues that must be addressed to get a holistic idea of societies in general. By learning about the economies through the problems, one can get enough idea about the demands and necessities of an economy. This may help businesses expand into newer markets with better products that help them earn more revenues and profits in return.
Problems of an economy are not just issues to understand the requirements of the society but they also offer insight into their basic structure. Understanding the needs and requirements of societies via the problems enlightens economists and businesses to understand the ultimate value proposition of their operations. That is why problems of economies are important for everyone.
Q1. What is the first problem of an economy?
Ans. The first problem of an economy is what to produce and to what extent?
Q2. Why knowing the extent of production is important?
Ans. Knowing the extent of production is important because resources are limited and over-producing may lead to wastage of resources which is undesirable. Knowing the extent of production can also show the exact demand for a product in markets, helping producers avoid too much production that may cause losses.
Q3. Why is the problem for whom to produce important?
Ans. For whom to produce is important because providing everyone with something may be a very tough issue for an economy. Moreover, all of the population of an economy may not need the same product. So, knowing the target market or whom to produce for is important.
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