Solution of central economic problems

Answer 1

Solution to the central problems

The basic problems are solved differently under different economic systems.

1.

Socialist or centrally planned

In 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 Economy

In 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 Economy

Mixed 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.