Chapter 3: Basic Problems of an Economy

Question 1

What is the fundamental problem of every society?

Answer 1

Scarcity is a fundamental problem of every society. Scarcity refers to the situation where there exists only limited amount of resources due to which we can produce only limited amount of goods.

Question 2

What are the Central Problems of an economy?

Answer 2

What to produce?
How to produce?
For whom to produce?

Question 3

What are the causes of economic problem?

Answer 3

1. Unlimited Wants:
2. Limited Resources: The supply of resources has increased overtime, but their demand has always been greater than their supply.
3. Alternate uses of resources: Choice has to be made

Question 4

What gives rise to economic problem?

Answer 4

The scarcity of resources having alternative uses in relation to unlimited wants that gives rise to economic problem.

Question 5

What is the problem of economising resources?

Answer 5

Making the best use of the available resources is known as the problem of economising of resources.

Question 6

What are the 2 techniques of production of goods? Explain.

Answer 6

Labour intensive technique: More labour and less capital is used.
Capital intensive technique: More capital and less labour is used.

Question 7

What are the 2 aspects of “For whom to produce”?

Answer 7

1. Functional Distribution: This implies how the various social groups: landowners, capitalists, workers and entrepreneurs receive their relative share of income when they produce goods and services. This is called problem of functional distribution.
2. Personal Distribution: The problem of distribution is also concerned with the problem of inequality in the distribution of income. That is, how the production should be distributed among individuals, households in the society.

Question 8

What are the 4 factors that determine the efficiency of use of resources?

Answer 8

• Production is said to be efficient if it is not possible to produce more of one good without reducing the output of another good in the economy.
• In the same way, the distribution is efficient, if it is not possible to make any 1 person better off without making other people worse off through the redistribution of goods.
• There should be no wastage of available productive resources.
• An economy must ensure that resources need to be utilised to provide maximum possible products

Question 9

What is the definition of economic growth?

Answer 9

An increase in national income or per capita income or output overtime. It indicates towards quantitative growth of a country.

Question 10

What are 3 important points about economic growth?

Answer 10

1. Economic Growth means an increase in per capita income which is a measure of the per capita availability of goods and services
2. Rise in per capita growth in real terms would mean economic growth.
3. Rise in per capita income over time.

Question 11

What is the definition of economic development?

Answer 11

The term economic development signifies qualitative aspects of economic progress of a country. For economic development to take place, increase in national income must be accompanied by fall in poverty ratio, reduction in income inequalities and unemployment.

Economic development equals economic growth + structural change.

Question 12

What are the structural changes that need to take place in economic development?

Answer 12

1. The contribution of the agricultural sector in national income decreases while those of industry and services increase.
2. the percentage of people engaged in the agricultural sector falls while the percentage of people engaged in industry and services sector tend to rise.
3. In the process of development, urbanisation takes place. The proportion of urban population tends to rise.