EconomicsCBSE Class 11 · Introduction

Central Problems, Economic Systems, Positive and Normative Economics

Updated 17 October 2026 · Fact-checked

Every economy must decide what to produce, how to produce and for whom to produce. A centrally planned economy decides by a government plan, a market economy by prices and demand and supply, and a mixed economy by both. Positive economics describes what is; normative economics says what ought to be. Microeconomics studies individual units; macroeconomics studies aggregates.

Understand Economic Systems and the Central Problems

Economy. A system by which people earn a living; it consists of households, firms and government engaged in production, exchange and consumption. Because resources are scarce, three central problems arise:
1. What to produce and in what quantities? Choice of goods and the split between consumer and capital goods; every choice has an opportunity cost.
2. How to produce? Choice of technique: labour-intensive or capital-intensive, based on cost and resources.
3. For whom to produce? Distribution of the output among people: depends on incomes and the principles adopted; links to inequality.

Economic systems.

Centrally planned economy: a central authority (government) decides what, how and for whom, through plans; resources are largely owned by the state; prices are administered. Strength: planned priorities, reduced inequality in principle; weakness: delays, little consumer choice, little incentive, and possible mismatch of output with demand.
Market economy: decisions by individuals and firms through markets; prices set by demand and supply coordinate choices; private ownership; profit motive. Strength: efficiency and choice; weakness: inequality, neglect of public goods, and instability. In a pure market economy, the government has a minimal role.
Mixed economy: both the market and the government play roles; private and public sectors coexist; the government provides public goods, regulates and redistributes. Most modern economies, India among them, are mixed economies in different degrees.

Positive and normative economics. Positive economics deals with facts and cause-effect; statements can be tested ('a rise in the price of petrol reduces its demand'). Normative economics involves value judgements about what ought to be ('petrol should be taxed more'). Disagreement in positive statements is resolved by evidence; in normative ones by values.

Microeconomics and macroeconomics. Microeconomics studies the behaviour of individual units: a consumer, a firm, a market; price determination. Macroeconomics studies the economy as a whole: national income, employment, inflation, growth. Micro looks at the trees; macro at the forest, though they are linked.

Examples. Pricing of a shirt: micro. Rate of inflation in a country: macro. 'Income inequality is unfair': normative. 'Income inequality has risen': positive.

Draw: a table with the three systems against decision-maker, ownership and prices.

Economic Systems and the Central Problems: key facts

Central problems: What
how
for whom; Arise from scarcity
Systems: Centrally planned government plan
Market prices
Mixed both; Decision makers
Statements: Positive: what is (testable) | Normative: what ought to be; Fact versus value
Scope: Micro: individual units | Macro: aggregates; Two branches

Centrally planned	government plan
Market	prices
Mixed	both

How to answer Economic Systems and the Central Problems questions

Questions give a statement and ask to classify it, or ask to compare systems.

1Ask: can the statement be tested with data? If yes, positive.
2Ask: is it about one unit or the whole economy? Micro or macro.
3For systems, state who decides and who owns resources.
4Link each central problem to the system.
5Use one current example.

Economic Systems and the Central Problems in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

New school canteen

Suppose a school decides what to cook, how to cook and for whom, given limited money.

Link the choices to the central problems.

Try it first, then show the solutionSolution

What: choose items such as rice and snacks.
How: use more cooks or a machine.
For whom: students pay or subsidised meals for some.

Answer: The canteen faces what, how and for whom.

Memory hook: Same three questions at every scale.

Tricks to remember Economic Systems and the Central Problems

Short memory aids. Say each one aloud once, then use it on a question the same day.

WHF
What, How, For whom.
Use it when: Central problems
P-N = Is-Ought
Positive is, Normative ought.
Use it when: Statements
Micro small, Macro mass
Micro individual, macro aggregate.
Use it when: Branches

Economic Systems and the Central Problems: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Central problems · 3 marks · Short answerBoard level

List and explain the three central problems of an economy.

Try it first, then show the solutionSolution

What to produce and in what quantity because resources are scarce (1 mark).
How to produce: choice of technique (1 mark).
For whom to produce: distribution of output among people (1 mark).

Answer: What, how, for whom.

Example 2: Classify the statements · 2 marks · Very short answerBoard level

Classify as positive or normative: (a) The price of onion rose by 20 per cent. (b) Onion prices should be controlled. (c) Higher incomes raise demand for cars. (d) Education should be free.

Try it first, then show the solutionSolution

(a) and (c) are positive (1 mark).
(b) and (d) are normative (1 mark).

Answer: Positive: a, c; normative: b, d.

Example 3: Systems compared · 4 marks · Short answerHarder board level

Compare centrally planned, market and mixed economies on who decides, ownership and a limitation of each.

Try it first, then show the solutionSolution

Planned: government decides, state ownership, limited choice or delays (1 mark).
Market: prices and individuals decide, private ownership, inequality (1 mark).
Mixed: market and government both decide, private and public ownership coexist (1 mark).
Limitation of mixed: needs balance and may have inefficiencies in the public sector (1 mark).

Answer: Decision-maker and ownership differ.

Example 4: Micro or macro · 2 marks · Very short answerHarder board level

Classify as micro or macro: (a) the price of tea (b) national unemployment (c) a firm's output decision (d) the rate of growth of the economy.

Try it first, then show the solutionSolution

(a) and (c) are micro (1 mark).
(b) and (d) are macro (1 mark).

Answer: Micro: a, c; macro: b, d.

Example 5: A policy debate · 5 marks · Long answerHOTS / competency

A government proposes a price ceiling on rent. Separate the positive and normative claims in "Rent control helps the poor and reduces the supply of rental housing, so it should be applied", and say how each can be settled.

Try it first, then show the solutionSolution

"Reduces the supply of rental housing" is a positive claim (1 mark).
It can be tested with data on housing supply (1 mark).
"Helps the poor" has a positive part (do poor tenants pay less?) that can be checked (1 mark).
"Should be applied" is a normative judgement based on values (1 mark).
Evidence settles the positive part; values and debate settle the normative one (1 mark).

Answer: Positive claims by data; normative by values.

Where students lose marks in Economic Systems and the Central Problems

The slips examiners see most often, and what to write instead.

Mistake: Mixing positive and normative
Words like should ignored.
Wrong working
"Prices should fall" is positive.
Right working
It is normative.
Do this: Should = normative.
Usually costs: 1 mark.
Mistake: Macro for one firm
Scope error.
Wrong working
A firm's output is macro.
Right working
It is micro.
Do this: One unit.
Usually costs: 1 mark.
Mistake: Market economy has no government
Extremes assumed.
Wrong working
No government role at all.
Right working
Minimal role.
Do this: Minimal.
Usually costs: 1 mark.

Exam tips

Name the three problems and link to scarcity.
Use two lines per system.
Test statements for verifiability.
Give examples.

Practice questions on Economic Systems and the Central Problems

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
An economy in which both private and public sectors play a role is called
(a) centrally planned (b) market (c) mixed (d) subsistence
Hint
Both.
Answer
(c).
Q2 · 1 mark · Assertion-reasonHarder board level
Assertion (A): The problem of what to produce arises in every economy.
Reason (R): Resources are scarce and have alternative uses.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.
Hint
Scarcity.
Answer
(a).
Q3 · 2 marks · Very short answerBoard level
Distinguish microeconomics from macroeconomics with one example each.
Hint
Unit vs aggregate.
Answer
Micro studies individual units, e.g. how the price of a product is determined; macro studies aggregates, e.g. the level of inflation in the economy.
Q4 · 4 marks · Case-basedHarder board level
Read and answer.
Suppose a country sets the output of every factory by a state plan and fixes prices by order.
(a) Name the economy. (1)
(b) Who decides for whom to produce? (1)
(c) State one merit and one demerit. (2)
Hint
Planned.
Answer
(a) Centrally planned economy. (b) The central authority. (c) Merit: planned priorities; demerit: little consumer choice or delays.
Q5 · 3 marks · Short answerHOTS / competency
Suppose an economist says, "Poverty is bad, so the government must spend more." Separate the value and factual parts and explain what evidence would test the factual part.
Hint
Value vs fact.
Answer
"Poverty is bad" and "must spend more" are normative. A factual part, such as "more spending reduces poverty", is positive and can be tested with data on spending and poverty rates.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Three problems?Show answer
What, how, for whom.
2.Mixed economy example?Show answer
India.
3.Positive statement?Show answer
A testable fact.
4.Normative?Show answer
A value judgement.
5.Micro studies?Show answer
Individual units.
6.Macro studies?Show answer
The economy as a whole.

Economic Systems and the Central Problems: frequently asked questions

What is an economy?

A system of earning a living.

What is a market economy?

One coordinated by prices.

What is a centrally planned economy?

One run by government plans.

Why do economic problems arise?

Scarcity.

What is positive economics?

Study of what is.