Solutions to The Basic Economic Problems in Capitalistic, Socialistic and Mixed Economies

Each economy faces some basic problems which are non-resistible in nature, they are:

    What to produce?

    How to produce?

    For whom to produce?

These problems arise because: human wants are endless, resources are limited in comparison to wants, and resources have alternative uses which creates the problem of choice.

Economies are classified as capitalist, socialist and mixed economy on the basis of ownership of factors of production. These economies face some central problems but the mechanism to solve these central problems is different.tly

Capitalist economy: an economic system wherein all the means of production are controlled by private individuals and profit earning is the only objective.

Capitalist economy deals with economic problem through: price mechanism.

It is a system where price is determined by the interaction of market forces, which acts as an automatic signal that co-ordinate the actions of individual decision making units.

There are two components of price mechanism: prices and market. The various conditions required for price mechanism to work are:

    Existence of competition

    Cost reflection of sacrifice

    Demand reflection of needs

    Mobility of resources

Shortcomings of capitalist economy are:

    Decline of competition

    Consumer’s sovereignty is a myth

    Individuals may not be the best judge

    Social welfare may not maximised

    Inequality in distribution of wealth and income

    Economic instability, etc.

A socialist economy is an economic system wherein all the means of production are controlled by state or planning authority and social welfare is the only objective. Under socialist economy government solves the central problems. What to produce and in what quantities are decided by planning authority. The planning authority decides the technique of production, after taking into consideration various aspects and how the output is to be distributed in the economy because all the productive resources are owned by government.

Mixed economy is an economic system wherein all the economic decisions are taken by both state and private sector. The objective is to earn profit with maximising social welfare. Government and private together solve the central problem in mixed economy. The government takes decisions to maximise social welfare while the private sector aims at maximising profits.

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  • Q1

    In a capitalistic economy, a producer must minimize the _________ in order to earn maximum profit.

    Marks:1
    Answer:

    Cost of Production

    Explanation:

    A producer must minimize the Cost of Production in order to earn maximum profit. It means a producer will produce the commodity using the cheapest method of production or efficient technique of production.

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  • Q2

    Identify the correct option that is applicable to Capitalist Economy.

    Marks:1
    Answer:

    High Profit

    Explanation:

    Profit: In Capitalist Economy the basic objective of the producers is to earn maximum profit and to gain profit they produce those goods and services which are demanded more by consumers.

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  • Q3

    Complete the following sentence “Equilibrium price is the price at which”

    Marks:1
    Answer:

    Quantity demanded is equal to quantity supplied

    Explanation:

    Equilibrium price is the price at which quantity demanded is equal to quantity supplied.

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  • Q4

    __________ plays an important role in determining the factor incomes in factor market in capitalistic economy.

    Marks:1
    Answer:

    Price mechanism

    Explanation:

    Price mechanism plays an important role in determining the factor incomes in factor market in capitalistic economy. It helps consumers in determining the composition of consumption expenditure.

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  • Q5

    In a ___________ basic problems are solved through price mechanism.

    Marks:1
    Answer:

    Capitalistic economy

    Explanation:

    In a capitalistic economy basic problems are solved through price mechanism.

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