Central Problems of an Economy

There are different causes of economic problems. Mainly, economic problems arise in every economy due to limited resources, unlimited wants, and alternative uses of resources. The economy fluctuates due to the disposal of goods and services of a company.

If we closely observe, the central problem of an economy deals with the allocation of its scarce uses. It also comprises having alternative uses as well as production of goods. The simple framework of the central problem of an economy includes: “What to produce?”, “How to produce?” and “For whom to produce?”

Due to the allocation of its scarce uses and resources, the “what to produce?” a problem arises. If limited resources are available, the limitation of production in the economy arises. To get the maximum output, the allocation of its scarce uses and resources must be done for different uses. For the production of decided goods and services, you need to decide on a particular procedure to use the total resources available in the market.

The third question, “for whom to produce,” is a major problem because it creates a question about what kind of services should be produced along with the quantity. This impacts consumer goods as well as the number of capital goods. This question is related to the distribution of an economy among a population. Most people don’t get the output of their products as compensation. So, the main problem for whom to produce describes the effect of various factors of production, which include compensation for their actual work.

The problems related to Optimum utilisation of resources and growth of resources also affect central problems of an economy.

Types of Economics

Economic theory is mainly classified into two parts: Microeconomics and Macroeconomics

1. Microeconomics

It is the branch of economics that deals with a very small part of individuals. Leon Walras proposed it in 1874 in the Element of Pure Economics. This involves economics which is concentrated on an individual company and product price. Therefore, it studies individual decisions and companies for allocation of its scarce uses, barter and utilisation of goods.

This affects the proper economising of resources and services among the population. It mainly deals with a particular industry, their connection with the different firms, and households that affect the market. The individual labour market is its main target. Due to this, we get an idea about detailed information about individuals and their businesses. Hence, it describes specific and detailed information as compared to macroeconomics.

For example, If you want to know how a particular company affects product demand in the market by increasing the product price, you can study microeconomics. It deals with a market value in a sole market which interacts with different markets.

While studying microeconomics, you need to consider different concepts as described below:

Utility Theory

When a consumer buys particular goods, they get their happiness, i.e.utility. Depending upon how much income they get, it shows that the utility of customers is directly proportional to their income.

Production Theory

This comprises a study of production technology via which manufacturers transform inputs into output. Manufacturers aspire to fuse input and procedure of their combination to decrease their cost in the market. This will help the producer to increase their production in the market. This interdependence is directly related to profit.

Price Theory

The combination of production and utility theory is the key point to making a theory of supply of goods and demand. This will help to control prices in a common market. To maintain economic equilibrium, price order by customers is equal to the same provided by the manufacturer. 

Example of Microeconomics

Price Discrimination in airline tickets

This example is always mentioned in most economic lectures to understand the real-life issues of microeconomics. That is to say, the fluctuations in flight ticket prices are used to understand microeconomics properly.

Let’s understand this interesting topic with this example.

The microeconomics of the airline industry greatly depends on the prices of various flights. The ticket prices fluctuate and create competition across other airline companies. For example, Company A lowers its ticket prices to overtake Company B and vice versa. This creates a price fluctuation in microeconomics.

Also, many factors are associated with this strategy which affects the microeconomics. In other words, the demand for particular flight tickets, weekend or festival time, busy hours, etc., are decisive factors for price fluctuation.

Moreover, the various data of microeconomics consist of ticket prices offered by competitors, customer’s pocket strength, and total seats left.

This data helps greatly in understanding the microeconomics of the flight booking industry.

2.Macroeconomics

The branch of economics that studies entire economics is known as macroeconomics. John Maynard Keynes proposed it in 1936. He published a book called “The General Theory of Employment, Interest, and Money”, where he first mentioned this concept.

According to Boulding, Macroeconomics studies the overall averages and aggregates of the system. It comprises the effect of different factors on the whole economy, such as Gross National Product (GNP). It mainly focuses on the effect of employment and unemployment in the market, giving an idea about total employment in the economy.

There are different measures of macroeconomics such as Gross domestic product, expansion and unemployment. The detailed study of macroeconomic data is helpful for investors during decision making.

It deals with aggregate decisions as it is the study of the whole economy. As it analyses the aggregate decision (AD), it is the best way to analyse market demands in bulk amounts and large supplies. Macroeconomics regulates the costs of various goods in the market.

Example of Macroeconomics

Inflation

One of the best examples to understand the concept of macroeconomics is inflation. Inflation causes so many issues in the overall economy of a nation.

Inflation, in simpler terms, can be described as the hiking prices of everyday things. That is to say, a toffee worth INR. 1/- today, will not be available at the same price after 10 years. So, the value of that one rupee will decrease to an extent where it cannot compensate for a toffee. This is how inflation works.

However, little inflation indicates that a country is under development. But if it exceeds a rate and turns into uncontrolled inflation, it can disrupt the macroeconomics of the nation.

So, the data from inflation can be studied to understand the macroeconomics of a nation.

Conclusion

In the end, it is important to consider the examples to understand both the concepts, macroeconomics and microeconomics. Inflation and price fluctuation are examples of macroeconomics and microeconomics, respectively.