One of the key words in the definition
of the term ‘economics’ is coordination. Coordination can mean many things. In
the study of economics, coordination refers to how the three central problems
facing any economy are solved. These central problems are:-
(i) What to produce
(ii) How to produce
(iii) For whom to produce
We explain below these problems in some
detail.
(i) What to produce:
The first major decision relates to the quantity and the range of goods to be
produced. Since resources are limited, we must choose between different
alternative collection of goods and service may be produced. It also implies
the allocation of resources between the different types of goods e. g. consume
goods and capital goods. Our wants are unlimited but resources are limited. So
a society can not produce any amount of goods. Here it is necessary to
determine what to produce and how much to be produced.
(ii) How to produce: We know resources are limited.
This means with what combination of resources a society decides to produce
goods. A combination of resource (or factors) implies a technique of
production. Usually, there are various alternative techniques of producing a commodity
and the society has to choose among them, each technique using a different
combination of resources like labor and capital.
For instance, cotton cloth can be produced with
either hand looms or power looms or atomic looms. Production with technique of
hand looms involves the use of more labor relatively to capital and therefore represents
a labor intensive technique. On the other hand, the production of cloth with
automatic looms of the modern textile mills involves use of more capital
relative to labor and hence represents a capital-intensive technique of
production.
(iii) For whom to produce: This
means how the national product is to be
distributed among the members of the society. Who should be get how much. This
is the problem of the sharing of the national product. Solution of this problem
depends of different economic system.
The central problems are solved by
two main methods. These are –
(a) Market or price mechanism
(b) Adoption of economic planning
(a) Market or price mechanism: The
first method is to solve these problems through market or price mechanism. That
is, what goods are to be produced and what quantities, which methods for
production are to be employed for the production of goods and how the output is
to be distributed, should be decided by the free play of the forces of demand
and supply. This method of solving these central problems through forces of demand
and supply is used by a free-enterprise capitalist economy.
(b) Adoption of economic planning:
The second method which can be employed to solve the central problems is the
adoption of economic planning. In this method, the solution of the various basic
problems is not achieved through the free
working of demand for and supply of goods and factors. But to solve these
problems, Government sets up a central planning names, such as planning
commission, planning ministry or planning board. This method of solving the
central problems through the use of economic planning had been adopted in the
former communist countries such as Soviet Russia, Poland, etc.
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