The basic function of an economic system is to ensure maximum possible satisfaction for the people of the country. For this purpose, the scarce resources of the nation have to be allocated and utilised towards the unlimited wants. The economic system has to tackle the following central problems:
- What to Produce: An economy has first of all to decide the goods and services that are to be produced. The nature and amount of goods to be produced are decided keeping in view the requirements of people and the availability of resources. A choice has also to be made between consumer goods and capital goods. If the amount of one type of goods is increased, the quantity of the other type may have to be reduced due to the scarcity of resources.
- How to Produce: The second fundamental problem is to decide the mode of production. Choice of suitable techniques of production is important because it affects the efficiency in the use of resources and the mix of factors of production. For example, in a heavily populated country like India highly capital – intensive techniques of production in all areas may result in scarcity of capital and widespread employment.
- For whom to Produce: This problem is concerned with the distribution of total output among the people. An economic system is expected to satisfy the needs of all sections of the society. However, in a capitalist economy, goods are produced the state ensure that goods are produced and distributed for all types of people.
- Choice Between Whom to Produce: Some wants are urgent and must be satisfied immediately. Other wants are, however, not urgent and can be postponed for the future. A rational allocation of resources is needed between the present needs and future of pollutions so as to serve the interests of both the present and the future generations.
- Economic Growth: In order to increase productivity and improve living standards of people, it is necessary to discover and utilise new resources in addition to better utilisation of the existing resources.