how are the central problems solved in a capitalist or market oriented economy?
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The important thing to know is how an economy solves these central problems which are essential to its functioning.
There are two main methods to solve these central problems. The first method is to solve these problems through market or price mechanism. That is, what goods are to be produced and what quantities, which methods for production are to be employed for the production of goods and how the output is to be distributed, should be decided by the free play of the forces of demand and supply.
In such an economic system, capital and other means of production are the private property of the individuals and private entrepreneurs who undertake the work of production. Consumers have freedom to buy the goods they want. In such a system, those goods are produced more for which there is greater demand and those goods are produced less for which there is less demand.
ADVERTISEMENTS:
The demand for and supply of various goods determine the prices and quantities produced of various goods. Besides, the prices of factors such as labour capital, land i.e., wages, interest, rent also depend upon their demand and supply and these factor prices determine the incomes of the owners of these factors and it is these incomes which determine the distribution of goods among the various individuals in a society.
Given the prices of the factors, entrepreneur decides which technique of production is to be employed (that is, which combination of factors or resources is to be used) for production of goods. This method of solving these central problems through market mechanism, that is, through forces of demand and supply is used by a free-enterprise capitalist economy.
The second method which can be employed to solve the central problems is the adoption of economic planning. In this method, the solution of the various basic problems is not achieved through the free working of demand for and supply of goods and factors. But to solve these problems, Government sets up a central planning authority which has been called by several names, such as planning commission, planning ministry or planning board.
What goods should be produced and in what quantities, bow should they be produced, how should they be distributed among the population and how much should be invested to bring about economic growth are all decided by the central planning authority. This method of solving the central problems through the use of economic planning had been adopted in the former communist countries such as Soviet Russia, Poland, etc.
There are two main methods to solve these central problems. The first method is to solve these problems through market or price mechanism. That is, what goods are to be produced and what quantities, which methods for production are to be employed for the production of goods and how the output is to be distributed, should be decided by the free play of the forces of demand and supply.
In such an economic system, capital and other means of production are the private property of the individuals and private entrepreneurs who undertake the work of production. Consumers have freedom to buy the goods they want. In such a system, those goods are produced more for which there is greater demand and those goods are produced less for which there is less demand.
ADVERTISEMENTS:
The demand for and supply of various goods determine the prices and quantities produced of various goods. Besides, the prices of factors such as labour capital, land i.e., wages, interest, rent also depend upon their demand and supply and these factor prices determine the incomes of the owners of these factors and it is these incomes which determine the distribution of goods among the various individuals in a society.
Given the prices of the factors, entrepreneur decides which technique of production is to be employed (that is, which combination of factors or resources is to be used) for production of goods. This method of solving these central problems through market mechanism, that is, through forces of demand and supply is used by a free-enterprise capitalist economy.
The second method which can be employed to solve the central problems is the adoption of economic planning. In this method, the solution of the various basic problems is not achieved through the free working of demand for and supply of goods and factors. But to solve these problems, Government sets up a central planning authority which has been called by several names, such as planning commission, planning ministry or planning board.
What goods should be produced and in what quantities, bow should they be produced, how should they be distributed among the population and how much should be invested to bring about economic growth are all decided by the central planning authority. This method of solving the central problems through the use of economic planning had been adopted in the former communist countries such as Soviet Russia, Poland, etc.
yuvi7270:
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