What determines production in a market economy?

Answer 1

Fundamentally, the decision of what is produced by private producers and the quantity that is produced is a function of revenue. Revenue is a function of the price that can charged for a commodity which itself is a function of demand for a product within the marketplace. Within the modern scarcity based market system increases in prices result in increases in production as the accounting allows for greater production to occur. If demand goes up while supply stays the same, the item will become more scarce, generally causing an upward tick on the price. Price is often a function of the supply of a product available on the market. The degree of scarcity of this product defining the degree of monetary rationing necessary. When dealing with commodities that are relatively demand inelastic, great profit can be had by producers if those producers have control over the amount of product that is created - thereby capable of manipulating price to their own advantage. Such destructive dynamics in the market-system led to record profits by oil producers in the 1973 and 1979 oil crisis. Competition within the market-place is supposed to counter-act this tendency that would otherwise incentivize a producer to charge an arbitrarily high price to maximize their profits. Unfortunately, corporate structures often form networks of cooperative price setting such as the suspiciously priced services offered by American cell phone conglomerates and the outrageously high charge of texting services that have been shown to be far outside of the actual cost incurred by the service provider. Oligopolies are often the end result, but only because laws are in place that would otherwise allow naked monopolies to form .

In a monetary-market system, production is always limited by the price and demand that can be fetched for what is produced. If the price of a particular item falls for factors other than supply and demand (like speculators adversely affecting wheat prices in 2010), producers of a product will be less capable of producing this commodity. The decrease in price limits their production output because their revenues are less relative to production. This has the consequence of adversely affecting their accounting. In many cases, it might put some producers out of business altogether. Orange producers were hit with this phenomenon in 2009 worldwide.

In a monetary system, there can be never be enough money to satisfy the true demand of everyone within the world, as purchasing power is inevitably made scarce by virtue of the very nature of our money system itself. True demand being defined as the amount people would consume of a commodity were it unnecessary to pay a price for it and there being no incentive or capacity to acquire the said commodity for the express purpose of resale.

As the availability of a product increases, its price generally falls - eventually interfering with production and making it impossible for producers to make any more and quite often forcing them to lower production as they cannot afford the higher costs relative to their income.

Money is used to ration everything that we presume cannot be created in abundance. All industries have costs associated with production because they need to pay the human labor involved as well as cover any other costs associated with running their business. The accounting therefore will always impose the necessity of assigning prices with a monetary system of production

An alternative approach to global production would be if you could eliminate human labor through automation and all associated costs from the equation. Considering that enough productive capacity could be brought to bear - it would then conceivably be possible to give everything produced away to everyone without the necessity of assigning a price at all thereby potenially eliminating the need for money entirely. Economists do not consider such concepts, as they presume that a 0 price would result in ∞ demand and therefore conclude it impossible as it lies outside of the their production possibilities curve. The other considerations of automation are not considered. Thus the concept of post-scarcity is generally left almost completely neglected, aside from the work of Jacque Fresco in his ingenious resource-based-economy.