What is price mechanism and How does it solve the basic problems in a capitalist economy?


Price mechanism refers to determination of prices of all goods and services through the forces of demand and supply. In a capitalist economy the basic economic problems are solved in the following manner:

(i) Producers produce those commodities which are priced high in the market and give them maximum profit.

(ii) Every producer tries to minimize his costs in order to maximize profits. Producers will prefer a technique of production which involves the least cost.


(iii) In a capitalist economy goods are produced for those who have the purchasing power and are willing to pay the price.

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