Individuals have numerous wants but possess only limited resources and skills. Since no individual can produce everything needed, they must exchange the goods or services they produce for those produced by others. Thus, the reason correctly explains why exchange mechanisms become essential.

A family farm can produce corn but cannot produce every good or service it needs. Therefore, it exchanges surplus corn for goods such as clothing and housing because individuals possess limited resources relative to their numerous wants.

Individuals use their available resources and skills to produce goods or provide services. A weaver exchanges cloth for other necessities, while a teacher earns income by teaching and purchases desired goods. Simply hoarding resources without production or exchange cannot satisfy diverse needs.

In a market economy, firms respond to consumer demand and price signals while making production decisions independently. In a centrally planned economy, major decisions regarding production, exchange, and resource allocation are made by the government or central authority.

Asset/Action — Economic Role Plot of land — Resource utilized to produce further output Doctor's treatment — Intangible service satisfying immediate wants Tools and machinery — Resource utilized to produce further output Labour skills — Productive resource used to earn income

In a market economy, price signals indicate how much society values a particular skill. Individuals use these skills to earn income by providing goods or services. The earned income is then spent on purchasing the goods and services needed for consumption.

Decision — Economic Question Producing agricultural equipment vs industrial machines — What is produced and in what quantities? Labour-intensive vs machine-intensive techniques — How are these goods produced? Food grains vs consumer electronics — What is produced and in what quantities? Manual farming vs mechanized farming — How are these goods produced?

Normative economics evaluates economic policies and outcomes based on value judgments. It considers whether adopting machinery instead of labour is desirable for society by examining issues such as welfare, employment, and equity rather than simply describing facts.

Individuals first face scarcity because resources are limited. Scarcity forces them to choose among competing alternatives. Whenever one option is selected, another is sacrificed. The value of the sacrificed alternative is known as opportunity cost.

With limited resources and existing technology, production beyond the Production Possibility Frontier is impossible. Scarcity also requires society to allocate resources among competing uses. Statement 2 is incorrect because scarcity always creates opportunity cost whenever choices must be made.

When production shifts from 10 units of cotton and 0 corn to 9 units of cotton and 1 corn, the economy sacrifices 1 unit of cotton to obtain 1 additional unit of corn. This sacrifice is called the opportunity cost, exactly matching the definition given in the reason.

The central problem of economics arises because resources are scarce while human wants are unlimited. Since the same resources can be used for different purposes, society must choose among competing alternatives. These choices create trade-offs and opportunity costs.

A mixed economy primarily relies on market forces for production and exchange while allowing the government to intervene in selected areas such as public welfare, healthcare, education, and regulation. Private enterprises are not abolished; therefore, Statement 3 is incorrect.

In a market economy, an increase in consumer demand raises prices. Higher prices signal producers that society values the good more. Producers respond by expanding production, thereby coordinating economic activities through the price mechanism.

Economic Reality — Societal Response Price rises for a highly demanded good — Producers increase production due to price signals Vital health service under-produced — Government intervenes or produces the service Demand increases — Producers expand output Essential public services lacking — Government allocates resources for public welfare

In theoretical analysis, it is often assumed that a society consumes only what it produces. However, in reality, economies can import goods and services from other countries or regions. As a result, consumption can exceed domestic production for certain goods through trade.

Normative economics focuses on what ought to be rather than what is. Questions such as whether income distribution is fair, whether everyone should receive healthcare, or whether a policy is desirable involve value judgments. Hence, evaluating the desirability of the final distribution of output belongs to normative economics.

One of the central economic problems is "For whom are goods produced?" If the market leaves certain individuals with too small a share of essential goods and services, the government or central authority may intervene to ensure a more equitable distribution and protect basic living standards.

According to the passage, the central authority plans production, exchange, and consumption. It decides how resources should be allocated based on what it considers desirable for society. Unlike a market economy, resource allocation is determined through planning rather than price signals.

In a centrally planned economy, the government decides how scarce resources are allocated among different goods and services. It also determines how the final output is distributed among individuals. Therefore, planning simultaneously addresses both resource allocation and distribution of goods and services, two fundamental economic problems.