How To Solve Economic Problem

The resource ownership is decided by factors such as merits, skills, inheritance and entrepreneurship.Factor price is decided by the demand and supply of the factors.Basic economic problems are simply because wants are unlimited & resources are limited.

Solving the problem what to produce in which quantity In a market economy this problem is addressed by the private sector entrepreneurs through the decisions made by them.

Since they always have the profit motive the commodity and factor prices are considered in decision making.

Hence this also called free market system because the price is the main device that solves all basic economic problems. It is said that in a market economy, there is an invisible hand operating due to (a) economy is operated by the price system, (b) buyers and sellers respond to price system and accordingly both parties get coordinated, (c) basic economic problems are solved using the price system.

In a market economy the basic economic problems are solved and resources are allocated in the following manner.

Since the private sector is concerned with profits they will select the most cost effective production method.

Hence the factor with the lowest price will be applied more in the production in order to minimize the production cost.

However since centralized decisions require plans set in advance for the desired outcome, these economies are called centrally planned economies.

In these economies, economic activities such as what to produce and how much to produce take place as per the commands of the central planners.

Evaluation of the total (life cycle) costs of alternative solutions to the problem of meeting the requirements of a particular client and choice of the best solution.

An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country’s citizens and businesses and there is little government intervention or central planning.


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