What are the basic economic problems and how do economics solve it?
Answers
Solution to Basic Problems in a Capitalistic Economy:
Price of various goods and services including the price of factors of production are determined with help of the forces of demand and supply. Free price mechanism helps producers to decide what to produce.
Uneven distribution of natural resources, lack of human specialization and technological advancement etc., hinders the production of goods and services in an economy. Every economy has to face the problems of what to produce, how to produce and for whom to produce. More or less, all the economies use two important methods to solve these basic problems.
this methods are-
(a) Free price mechanism and
(b) Controlled price system or State intervention.
Price mechanism is defined as a system of guiding and coordinating the decisions of every individual unit within an economy through the price determined with the help of the free play of market forces of demand and supply. Such system is free from state intervention.
Price of goods and services are determined when quantity demanded becomes equal to the quantity supplied. Price mechanism facilitates determination of resource allocation, determination of factor incomes, level of savings, consumption and production. Price mechanism basically takes place in a capitalistic economy.