the Central problems of an Economy refer to problems of allocation of limited resources to satisfy various human wants.
Human wants are unlimited. But resources to satisfy those wants are limited. Also, some of these limited resources have alternate uses.
This situation gives rise to following problems (central problems of an economy)-
For whom to produce?
This problem is related to the distribution of goods & service in the economy.
It is related to the choice between
- Production of goods and services for richer section of society
Or
- Production of goods and services for the poorer section of society
Production of goods and service for poor leads to maximum social welfare, whereas production of goods and services for rich leads to more profit. For example, if an economy concentrates on the production of luxury goods, then this will improve the standard of living of rich class, but the life of poor will become more difficult. On the flip side, if an economy concentrates on the production of necessary goods, then this will serve the society but profits will reduce. Hence the problem of for whom to produce arises.
