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How does market mechanism work to solve the basic problems in a free market eocnomy?

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2009-09-27 20:01:05
2009-09-27 20:01:05

how does the market mechanism solve the basic problem of free market economy?

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the basic coordinating mechanism in a free market system is Price.


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A mixed economy can use the price mechanism to solve basic economy problem by eliminating a surplus if there is a surplus of goods causing the problem. This will cause the market price of those goods to drop. The price mechanism can also be used to expand suppliersâ?? production of a certain good when prices are rising because there is a high customer demand for that good.


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The price mechanism is a feature of the free market and operates through demand and supply and the self interest of individuals, government action is minimised. This has the benefits of incentive, efficiency, innovation, choice and consumer sovereignty. Against this there may be market failure including inequality, lack of public and merit goods, externalities and instability. Depending upon the degree of failure the mechanism may be more or less effective. The price mechanism does not solve the basic economic problem but is thought to be effective when operating efficiently.


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Mechanism is a basic element from the science group. > SPOILER < Combining law and tools makes mechanism.


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A basic feature of the free market system is that consumers make their own economic choices



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The equilibrium price refers to the price point at which supply and demand are equal. This price can be found by applying the three basic properties of equilibrium.


Price mechanism is an effective way to solve the basic economic problem. The price of a product is what will determine the demand and this will influence the production output which directly affects the economy.


Solution to the central problemsThe basic problems are solved differently under different economic systems.1.Socialist or centrally plannedIn a centrally planned economy,the government or the central authority or planning authority plans all the important activities in the economy.All important decisions regarding production,exchange and consumption of gods and services are made by the government.The central authority may try to achieve a particular allocation of reasources and a consequent distribution of the final combination of goods and services which is thought to be desirable for society as a whole.For example,if it is found that a good or service which is very important for the prosperity and well-being of the economy as a whole.2.Market or Capitalist EconomyIn a market economy,the problems are tackled by the market forces of demand,supply and price.A market is an institution which organises the free interaction of individuals pursuing theri respective economic activities.In a maret system,all goods or services come with a price (which is mutually agreed upon by the buyers and sellers) at which the exchanges take place.If the buyers demand more of a certain good the price of that good will rise.This will send a signal to the producer of that good,to that society as a whole wants more of that good than is currently being produced and the producers of the good in turn likely to increase their production.Thus,in a market system,the central problems are solved through the coordination of the economic activities brought about by the prices signals.3.Mixed EconomyMixed economy is a mixture of capitalism and socialism.In a mixed economy public sector and private sector co-exist.In a mixed economy the basic problems are solved through planning and price mechanism planning is used in the public and private sector works on the basisof market mechanism or price mechanism.


Permitting individual freedom is the basic tenet of market economy.


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There are four basic market models based on the amount of competition within the industry. They are pure competition, monopolistic competition, oligopoly, and pure monopoly.


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