The core question of what and how much to produce; how to produce and for whom it depends on the free price mechanism.
(i) What to produce:
Let us consider the first question: “What commodities are to be produced and in quantity? Commodities that do not invest in the market will not be generated. Therefore, only those commodities with regular prices can be produced and in a way that clears the market.
When demand equals supply, the quantity of goods to be produced is set to this level. If the quality generated is more or less, then the market will vary and the price will fluctuate.
Therefore, in order to maintain a stable balanced price, demand and supply need to be equal. This rule applies to every product. In this way, the first central problem was solved.
(ii) How to produce:
In this case, it is: “What technologies are to be adopted”? Technology means adopting the correct proportion of different production factors.
There are two types of techniques. A labor-intensive technology will employ relatively high labor and less capital. Capital-intensive technology, on the other hand, means more capital and less labor.
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The choice of technology depends on the price of production factors. That is, if labor is cheap and capital is expensive, a labor-intensive technology will be considered, and vice versa.
The prices of labor and capital depend on the demand and supply of labor and capital, respectively. In this way, the second problem will be solved.
(iii) for whom:
The solution to this problem is a very simple commodity that can only be consumed by those with more purchasing power. The price mechanism determines the worker’s income, that is, purchasing power.
The purchasing power of the capital owner is determined in the same way. Therefore, when the price of each commodity and the price of each factor of production is determined, a third problem will be solved.
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