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.

The concept of PP curve is based on the following assumptions:
(i) First, the amount of resources in the economy is fixed.
(ii) Second, the technology is given and unchanged.
(iii) Third, the resources are efficient and fully employed.

Production possibility curve is a curve which depicts all possible combinations of two goods which can be produced with given resources and technology in an economy.
Properties of Production Possibility Curve
(i) PPC is downward sloping: The downward slope of PPC means if the country wants to produce more of one good, it has to produce less quantity of the other goods.
(ii) PPC is concave to the point of origin:
Concave shape of PPC implies that the slope of PPC increases. Slope of PPC is defined as the quantity of goods Y given up in exchange for additional unit of goods X.
[Slope of Production Possibility Curve]
\(=\frac { \triangle Y }{ \triangle X } =\frac { Amount\ of\ Goods\ Y\ lost }{ Amount\ of\ Good\ X\ gained } \)
[Slope of PPC] = MRT = [Marginal Opportunity Cost]

The central problems of an economy are:
(i) What to produce and in what quantity?
(ii) How to produce?
(iii) For whom to produce?

All economies whether developed or developing, have similar central problem because one or more of their resources (land, labour, capital and entrepreneurship) are limited and these resources can be put to alternative uses. The wants of the economies are unlimited. Therefore all economies have to face the basic economic problem of choice (what to produce, how to produce and for whom to produce).

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.