How basic economic problems are solved in different economies

How basic economic problems are solved by socialist economy, capitalist economy and mixed economy are discussing here.

1. HOW BASIC ECONOMIC PROBLEMS ARE SOLVED IN DIFFERENT ECONOMIES

2. Factors of Production There are 4 factors of Production; Land Labour Capital Organisation On the basis of ownership of these factors of production, economies are classified into; Capitalist Economy Socialist Economy Mixed Economy

3. Basic Economic Problems What to Produce? How to Product? For whom to Produce? We are trying to understand how these basic economic problems are solved in these 3 types of economies.

4. Capitalist Economy - factors of production are owned and controlled by private individuals. Eg : USA Socialist Economy - factors of production are owned and controlled by state or government. Eg : China Mixed Economy - co-existence of private and public sectors. Eg : India

5. Solutions to Basic Economic Problems in Capitalist Economy Capitalist Economy deals with economic problem through price mechanism . Price Mechanism: It is a system where price is determined by the interaction of market forces and it is adjusted automatically. Prices play a key role in directing the activities of producers, consumers and resources suppliers. There are two components of price mechanism: prices and market. Price: determined by the forces of demand and supply. Market: goods market and factor market. Price mechanism acts as the coordinating agency. Economic decisions are taken and implemented through price mechanism.

6. 1) What to Produce? The consumer is supreme. The basic objective of the producers is to earn maximum profits. Producers will like to produce those goods and services which yield higher profits. An increase in the demand for a particular commodity will lead to a rise in its price. A rise in the price of a commodity, given the cost of production, will lead to more profits.

7. 2) How to Produce? The basic objective of the producers is to earn maximum profits. A producer must minimize the cost of production. The cost of a technique of production is determined by the prices of inputs and the input prices are determined by price mechanism in the factor market . The producer chooses that technique of production which is least costly .

8. 3) For whom to Produce? Distribution of total output of goods and services depends upon the distribution of income. As a result of this unequal distribution of income, the distribution of goods is also very much unequal. The rich people get a larger share of the national product. The poor people with low incomes, receive a smaller share of the national product.

9. Solutions to Basic Economic Problems in Socialist Economy Socialist economy is an economic system wherein all the means of production are controlled by state or planning authority and social welfare is the only objective. All the decisions including economic aspects are taken by public authority. Basic economic problems are solved here through economic planning.

10. 1) What to Produce? Planning authority makes an estimation of the available economic and human resources. It estimates the requirement of the economy for various goods and services. It evaluates the needs of the people and the national priorities. It makes necessary arrangements for adequate amount of commodities to be made available to the people.

11. 2) How to Produce? It considers the economic efficiency of the techniques and the social objectives and development goals. The country has to ensure that economic resources are fully utilised. 3) For whom to Produce? All productive resources are owned by the government. People work only as labours and earn income in the form of wages only. a skilled worker gets higher wages than an unskilled worker. administered price mechanism operates in a socialist economy. The government also distributes various goods, particularly essential goods at fixed or controlled prices through ration shops or fairprice shops.

12. Solutions to Basic Economic Problems in Mixed Economy Economy Mixed economy is an economic system wherein all the economic decisions are taken by both state and private sector. The objective is to earn profit with maximising social welfare. Government and private together solve the central problems in mixed economy. The government takes decisions to maximise social welfare while the private sector aims at maximising profits.

13. 1) What to Produce? Consumers preferences influence the production decisions of the firms. Production in the private sector is also controlled and regulated by the government through the monetary, fiscal and price control policies. In the public sector, it is the planning authority that decides what to produce and how much to produce keeping in mind the overall national objectives. There will be fiscal policy and monetary policy.

14. 2) How to Produce? In the private sector it is the price mechanism that solves the problem of how to produce. Firms will choose the method of production on the basis of factor prices. Profit motive motivates them to choose the least costly or the most efficient technique of production. In the public sector, the problem of how to produce is solved by the planning authority and the government. The planning authority is influenced not only by the input prices, but also by the objectives of generating more employment opportunities, promoting economic growth, etc.

15. 3) For whom to Produce? The decision for whom to produce is taken by the government. The main objective of the government is that adequate quantity of necessities must be produced. The government controls production in the private sector as well to achieve this objective so as to ensure the availability of necessities .