What are the solutions of central problem of an economy? Explain in detail
Basic problems in Capitalist economies are solved through price mechanism, in Socialist economy through planning and in mixed economy through price mechanism and economic planning.
Every economic activity in Capitalist economy is influenced by profit motive. The producer wants to earn more profit through its investment. He is encouraged to produce only those commodities which will fetch him handsome profit. The worker on the other hand selects those jobs where maximum wages are paid. The consumer also prefers to buy those commodities which provide him maximum satisfaction. The price of the commodity is determined by the interaction of the forces of demand and supply i.e., between consumers and producers in the commodity market. In the same way, price of the factors of production is determined in the factor market.
Socialist economy is managed and controlled by the government. Social welfare is the object of the government. The government adopts planned development economy. Planning commission is instructed to formulate policies and decide guidelines for the balanced economic growth. Priority is given to the production of those goods and services which satisfies needs of common man. Every commodity is sold at one price throughout the country by government agencies.
In a mixed economy , public sector and private sector both co-exist. For the solution of central economic problems, different mechanisms are used in these two private and public sectors.
In the public sector, planning system is used by the state or planning authority to solve various central problems of the economy
In a private sector also forms a major part of the economy. In this sector, decisions regarding various central problems why, how and for whom to produce are taken by the price mechanism based on profit motive and market forces of demand and supply.