Price Mechanism in a Capitalist Economy

In a capitalist economy, every last(predicate) the primaeval problems are solved with the foster of value mechanism. In such an economy, no individual or a firm deliberately tries to solve the central problems all economic activities bring autoloading(prenominal)ally and there is no conflict anywhere. The basic reason for all this is that price mechanism brings about co-ordination in various sectors of economy and in various economic activities. The important characteristic of such a system is that it is automatic and there is no institution or agency which regulates or operates it.The infrastructure of price mechanism is that every goodness or service has a price which is determined with the help of allow for and beg. Every commodity is bought and change through coin. If a person sells his serve or commodity, he gets money and in lieu thereof he can buy goods and services which he needs. If there are more buyers of a commodity, its contain goes up and namers ontogen esis its issue. On the other hand, if a commodity is available in abundance, its supply increases, with the leave behind its price goes down and fetchrs reduce its issue.Whenever there is a difference or disequilibrium between supply and withdraw, price starts changing, with the result this difference disappears and again an equilibrium is established between supply and demand. demand and supply curves intersect each other at point E where price is OP and equilibrium output OQ. According to the schedule equilibrium price will be Rs. 10 because at this price demand and supply are equal. In a capitalist economy, all the central problems are solved with the help of price mechanism.Now we would sec as to how all the central problemswhat to produce, how to produce and for whom to producearc solved with the help of price mechanism. 1. What to produce? In a capitalist economy, proceeds of a commodity is headstrong by the forces of demand and supply. As the issue of a commodity depe nds upon its demand and supply, in the aforesaid(prenominal) way aggregate output is determined by aggregate demand and aggregate supply. The level of output where aggregate demand and aggregate supply are equal is finally fixed as equilibrium output.In the aggregate output, what should be the quantities of different commodities. This ending is also taken by the equilibrium of demand and supply of different commodities. The labor of the commodity is increased whose price goes up as a result of increase in its demand. On the other hand, if the demand of a commodity declines, its production is reduced. 2. How to produce? As the competition among consumers decides as to what goods should be produced, in the same way, the competition among the producers decides as to how goods should be produced.A commodity can be produced adopting a number of techniques. The method or technology which is the cheapest is adopted and the one which is costlier is abandoned. Therefore, the decision as to how goods should be produced depends on the prices of factors. A producer combines various factors for producing a commodity in such a way so that his production cost is minimum. For example, coal and diesel both can be use as fuel. If coal is cheaper in comparison to diesel, coal would be use and reverse would be the case if diesel is cheaper.In this way, the choice of technique of production or the factor combination depends upon the factor prices. In a realm where there is abundance of delve and wages are low, more of labour and less of capital would be used. On the other hand, in a country where there is less of labour and more of capital, capital-intensive techniques would be used. 3. For whom to produce? In a capitalist economy, production of commodities depends upon the buying capacity of the consumers in the market. It is a well known fact that the paying capacity of a consumer depends upon his purchasing power or his income.Besides this, the income of a consumer depend s upon the fact as to how such(prenominal) his services are demanded. Higher the demand for a persons services, higher would be his income. If the income of a consumer is more, his capacity to buy is more. In such a situation, production will be carried out for such persons whose incomes are more or who can pay. Therefore, in a capitalist economy, it is observed that price-mechanism facilitates more production of luxuries meant for rich people and less production of goods of mass consumption meant for worthless people.