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Disclaimer: This work has been submitted by a student.This is not an example of the work produced by our Essay Writing Service.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.
Solving the problem whom to produce This problem stresses how the economy’s total output gets distributed among people.
This is decided by the distribution of income among people.
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.
Accordingly they will allocate more resources to produce more of goods with higher profits.
Solving the problem how to produce This problem is concerned with the selection of production method by referring to the factor market.
Therefore this problem is solved by the operation of the factor market.
In command or planned economies, questions on resource allocation are decided by a central authority often the government or a state controlled council.
with a view of achieving a set of selected objectives.
Solving the problem what to produce in which quantity It is the central planning authority that decides the resource allocation between consumer and investment goods.