Economics

Lecture 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. Economic system consists of various individuals and their institutions like banking institutions, educational institutions and economic institutions. The most general economic systems are:

1. Traditional Economy

2. Capitalist Economy

3. Socialist Economy

4. Mixed Economy

I. Traditional Economy

In traditional economy, the basic problems are solved by traditions and custom rules every aspect of behaviour. It produces exactly to...