The central problems facing an economy are:

(i) What to produce? i.e., which goods should be produced and in what quantities. Every economy has limited resources and cannot produce all goods and services. Should it produce more capital goods or consumer goods? More consumer goods can be produced only by reducing the production of capital goods.

(ii) How to produce? Goods can be produced in many ways, and the producer has to decide how he will combine the different factors of production. Will he use a labour intensive or capital intensive technique? This is a problem of choice of technique.

(iii) For whom to produce? This is a problem of distribution of national product among the different groups or members of a society.


(iv) Efficient use of resources, i.e., resources are being put to their best possible use and the producer is earning maximum profit.

(v) Growth of resources, not only should the available resources be utilized efficiently but it is equally important that they grow rapidly. A part of the resources should be used to produce capital goods. This will enable the society to produce more consumer goods and capital goods in the future.