The three central problems of an economyare:
(i) What to produce?
(a) What to produce refers to a problem in which decision regarding which goods and services should be produced is to be taken.
(b) Since its resources are limited, every economy has to decide what commodities are to be produced and in what quantities.
(c) The guiding principle for an economy here is to allocate resources in such a way that gives maximum aggregate utility to the society.
(ii) How to produce?
(a) How to produce refers to a problem in which decision regarding which technique of production should be used is made.
(b) Goods and services can be produced in two ways: by using labour intensive techniques, and by using capital-intensive techniques
(c) The guiding principle for an economy in such a case has to decide about the techniques of production on the basis of cost of production. Those techniques of production should be used which lead to the least possible cost per unit of commodity or service.
(iii) For whom to produce? 
(a) For whom to produce refers to a problem in which decision regarding which category of people are going to consume a good, i.e., economically poor or rich.
(b) As we know, goods and services are produced for those who can purchase them or have the capacity to buy them.
(c) Capacity to buy depends upon how income is distributed among the factors of production. The higher the income, the higher will be the capacity to buy and vice versa. So, this is a problem of distribution.
(d) The guiding principle is that the economy must see here that important and urgent wants of its citizens are being satisfied for the maximum possible extent or not.

Economic problem arises because of scarcity of resources in relation to demand for them.
(i) Wants are unlimited:
(a) This is a basic fact of human life. Human wants are unlimited.
(b) They are not only unlimited but also grow and multiply very fast.
(ii) Resources are limited:
(a) The resources to produce goods and services to satisfy human wants are available in limited quantities. Land, labour, capital and entrepreneurship are the basic scarce resources.
(b) These resources are available in limited quantities in every economy, big or small, developed or underdeveloped, rich or poor. Some economies may have more of one or two resources but not all the resources.
(c) For example, Indian economy has relatively more labour but less capital and land. The U.S. economy has relatively more land but less labour. No economy in the world is comfortable in all the resources.
(iii) Resources have alternative uses:
(a) Generally a resource has many alternative uses.
(b) A worker can be employed in a factory, in a school, in a government office, self employed and so on.
(c) Like this, nearly all resources have alternative uses. But the problem is that which resource should be put to which use.

Economic problem arises because of scarcity of resources in relation to demand for them.
(i) Wants are unlimited:
(a) This is a basic fact of human life. Human wants are unlimited.
(b) They are not only unlimited but also grow and multiply very fast.
(ii) Resources are limited:
(a) The resources to produce goods and services to satisfy human wants are available in limited quantities. Land, labour, capital and entrepreneurship are the basic scarce resources.
(b) These resources are available in limited quantities in every economy, big or small, developed or underdeveloped, rich or poor. Some economies may have more of one or two resources but not all the resources.
(c) For example, Indian economy has relatively more labour but less capital and land. The U.S. economy has relatively more land but less labour. No economy in the world is comfortable in all the resources.
(iii) Resources have alternative uses:
(a) Generally a resource has many alternative uses.
(b) A worker can be employed in a factory, in a school, in a government office, self employed and so on.
(c) Like this, nearly all resources have alternative uses. But the problem is that which resource should be put to which use.

If the river Kosi causes widespread floods in Bihar, it will lead to destruction of resources in Bihar. This will shift the PPC leftward. Initially PPC is PP. With floods, the PPC will shift to P₁P₁
Value: Analytic

Production possibility curve is a curve which depicts all the possible combinations of goods which can be produced with given resources and technology in an economy i.e., producing goods at its full potentiality. Production below the potentiality means that total production in the economy is somewhere below the production possibility curve PPI, for example, point U in the diagram. We know production below the production possibility curve highlights unemployment. When government starts employment generation schemes, the economy moves towards the full employment, thereby removes unemployment. So, economy comes back to its potential level.
Value: Analytic

Opportunity cost of any commodity is the amount of other good which has been given up in order to produce that commodity. Alternatively, opportunity cost of a given activity is the value of the next best activity.
Production Possibility Schedule

Initially at combination B, in order to produce one unit of X, the economy has to sacrifice one unit of Y. So, at combination B, opportunity cost is 1 unit. At combination C, for producing additional unit of commodity X, the economy has to sacrifice 2 units of commodity Y. So, at combination C, opportunity cost is 2 units. Similarly, at combination D, for producing additional unit of commodity X, the economy has to sacrifice 3 units of commodity Y. So, at combination C, opportunity cost is 3 units and so on.

The given statement is refuted. An economy operates on PPC, only when resources are fully and efficiently utilised. It means, if there is unemployment or inefficient use of resources, the economy may operate inside PPC. So, the economy may operate at point 'H' (Figure), in addition to the points on the curve AB on PPC.