What to Produce?
This problem is also known as the problem of allocation of resources. It implies that every economy must decide which goods and in what quantities are to be produced. The economy must make choices such as these: consumption goods versus capital goods, civil goods, versus military goods, and necessity goods versus luxury goods. As we know that the resources to produce any of these goods are limited, we must reduce the production of one type of goods if we want more of another type. Generally the final choice of any economy is a combination of the various types of goods, but the exact nature of the combination depends upon the specific circumstances and objectives of the economy
How to Produce?
This problem is also known as the problem of choice of technique. Once an economy has reached a decision regarding the types of goods to be produced, and has determined their respective quantities, the economy must decide how to produce them, choosing between alternative methods or techniques of production. For example, cotton cloth can be produced with hand looms, power looms, or automatic looms. Similarly, wheat can be grown with primitive tools and manual labour, or with modern machinery and little labour.
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