How market solve the three economic problems?
Answers
it is the most economic problem in the market
We have just described how prices help balance consumption and production (or demand and supply) in an individual market. What happens when we put all the different markets together-beef, cars, land, labor, capital, and everything else? These markets work’simultaneously to.determine a general equilibrium of prices and production.
By matching sellers and buyers (supply and demand)in each market, a market economy simultaneously solves the three problems of what, how, and for whom. Here is an outline of a market equilibrium: 1. What goods and services will be produced is determined by the dollar votes of consumers-not every 2 or 4 year at the polls, but in their daily purchase decisions. The money that they pay into businesses’ cash registers ultimately provides the payrolls, rents, and dividends that consumers, as employees, receive as income.
Firms, in turn, are motivated by the desire to maximize profits. Profits are net revenues, or the difference between total sales and total costs. Firms abandon areas where they are losing prof.its; by the same token, firms are lured by high profits into production of goods in high demand.Some of the most profitable activities today are producing and marketing legal drugs drugs for depression, anxiety, impotence, and all other manner of human frailty. Lured by the high profits, companies are investing billions in research to come up with yet more new and improved chemicals.
2. How things are produced is determined by the competition among different producers. The best way for producers to meet price competition and maximize profits is to keep costs at a minimum by adopting the most efficient methods of production. Sometimes change is incremental and consists of.little more than tinkering with the machinery or adjusting the input mix to gain a cost advantage., which can he very important in a competitive market. At other times there are drastic shifts in technology, as with steam engines displacing horses because steam was cheaper per unit of useful work, or airplanes replacing railroads as the most efficient mode for long distance travel. Right now we are in the midst of . just such a transition to a radically different technology, with computers revolutionizing many tasks in the workplace, from the checkout counter to the drafting table.
3. For whom things are produced-a-who is consuming and how much-depends, in large part, on the supply and demand in he markets-for factors of production. Factor markets (i.e., markets for factors of production) determine wage rates, land rents, interest rates, and profits. Such prices are called factor prices. The same person may receive wages from ajob, dividends from stocks, interest on a bond, and rent from a piece of property. By-adding up all the revenues from factors, we can calculate the person’s market income. .The distribution of income among the population is thus determined by the quantity of factor services (person-hours, acres, etc.) and the prices of the factors (wage rates, land rents, etc.)
Be warned, however, that incomes reflect more than the rewards for sweaty labor or frugal living. High incomes can come from large inheritances, good luck, and skills highly prized in the marketplace. Those with low incomes are often pictured as lazy, but the truth is that low incomes are generally the result of poor education, discrimination, or living where jobs are few and wages are low. When we see someone on the unemployment line, we should rem-em-· her, “There, but for the grace of supply and demand,go I.