Chapter 2: Basic Problems of an Economy

Top 30 Questions and Answers

1. What are the basic economic problems?
   The basic problems are:
2. What to produce
3. How to produce
4. For whom to produce
   These arise due to limited resources and unlimited wants.
5. Why do basic problems arise in all economies?
   They arise because resources are scarce and cannot satisfy all human wants, forcing choices and prioritization.
6. What is meant by ‘what to produce’?
   This problem involves choosing which goods and services to produce and in what quantities, based on the needs of society.
7. Explain the problem of ‘how to produce’.
   It deals with selecting the method of production—whether labor-intensive or capital-intensive—depending on resource availability and efficiency.
8. What does ‘for whom to produce’ mean?
   This refers to determining how goods and services are distributed among different sections of society, considering income and social welfare.
9. What is the problem of fuller utilization of resources?
   It involves ensuring that all resources like land, labor, and capital are used efficiently to maximize production and reduce wastage.
10. What is the problem of economic efficiency?
    It refers to the optimal use of resources to achieve maximum output with minimum cost, ensuring no resource is left idle.
11. What is the problem of growth?
    It concerns increasing the productive capacity of the economy over time to improve the standard of living and reduce poverty.
12. What is the problem of equitable distribution?
    It deals with ensuring a fair distribution of income and wealth so that the gap between rich and poor is minimized.
13. How do different economies solve basic problems?
    Capitalist: by market forces
    Socialist: by government planning
    Mixed: by a combination of both market and government
14. What is a capitalist economy?
    An economy where means of production are privately owned, and decisions are made through market demand and supply. Example: USA.
15. What is a socialist economy?
    An economy where resources are owned by the state and production decisions are centrally planned. Example: North Korea (formerly USSR).
16. What is a mixed economy?
    An economy that combines features of both capitalism and socialism. Public and private sectors co-exist. Example: India.
17. What are economic activities?
    Activities involving production, distribution, and consumption of goods and services for income generation are called economic activities.
18. What is economic planning?
    It is a conscious effort by the government to allocate resources and achieve specific economic goals through long-term plans.
19. How does a capitalist economy decide ‘what to produce’?
    Through the price mechanism—goods in demand are produced more, while less profitable goods are not prioritized.
20. How does a socialist economy decide ‘how to produce’?
    Government decides the best method considering social welfare, employment, and equality, not just cost efficiency.
21. What are central problems of an economy?
    Same as basic problems—what, how, and for whom to produce—due to the scarcity of resources.
22. Why is scarcity a fundamental economic problem?
    Scarcity forces individuals and governments to make choices, as resources are limited but wants are unlimited.
23. What is the role of choice in economics?
    Choice means selecting one alternative over others. In economics, we choose how to use limited resources for maximum satisfaction.
24. What is the role of the price mechanism?
    In a capitalist economy, the price mechanism determines resource allocation based on demand, supply, and profit motives.
25. How is inequality handled in a mixed economy?
    Through government intervention—taxation, subsidies, welfare schemes—to reduce income and wealth disparities.
26. What are the main features of a mixed economy?
27. Coexistence of public and private sectors
28. Government regulation
29. Price mechanism
30. Planning for social welfare
31. Give an example of ‘for whom to produce’.
    A government may choose to produce affordable public housing for low-income groups rather than luxury homes for the rich.
32. What is the difference between micro and macro problems?
    Micro deals with individual units like firms and households, while macro deals with economy-wide issues like inflation, unemployment, and GDP.
33. What is resource allocation?
    It is the process of distributing scarce resources among various uses in an economy to satisfy different needs and wants.
34. Why is efficient allocation important?
    Efficient allocation ensures maximum output with minimal waste, fulfilling more wants using the same limited resources.
35. What is the role of the government in a socialist economy?
    The government controls all production, distribution, and pricing to ensure social welfare and equality.
36. Why is growth an important economic objective?
    Economic growth increases income, employment, and living standards, helping to reduce poverty and support development.
37. How can equitable distribution be achieved?
    Through progressive taxation, subsidies, social security programs, free education and healthcare, and support to the poor.