Meaning in Simple Words

An economy must decide how to produce goods and services.

It must choose the method of production.

It can use more workers or more machines. The choice depends on the cost, available resources, and production needs.

Real-Life Example

A farmer wants to harvest wheat.

The farmer can hire many workers to cut the wheat by hand. Or the farmer can use a harvesting machine.

Both methods can harvest wheat, but they use different resources.

Choosing the method is called the problem of how to produce.

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Exam Answer

The problem of how to produce means choosing the method used to produce goods and services. An economy can use more labour or more machines. For example, a farmer can harvest wheat using workers or a harvesting machine.