In a market economy, the central problems are solved bya) Supply of goodsb) Planning authorityc) Demand for goodsd) Market mechanismCorrect answer is option 'D'. Can you explain this answer?

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Capital economy is also called market economy or free trade economy....market forces like demand supply and prices that drives the capitalist economy.......

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Because in market economy, economic activities are controlled by the market forces. Economic decisions are driven by the motive of profit maxmisation.

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The correct answer is option 'D' - Market mechanism.

Market economy, also known as a free market economy or capitalism, is an economic system where the central problems of what to produce, how to produce, and for whom to produce are primarily solved by the market mechanism. Let's delve into the details of why the market mechanism is the correct answer:

Market Mechanism in a Market Economy:
1. Definition and Function:
- The market mechanism refers to the interaction of supply and demand forces in determining the allocation and pricing of goods and services.
- It functions through the forces of supply and demand, where buyers and sellers freely engage in trade based on their own self-interests.

2. Allocation of Resources:
- In a market economy, the market mechanism plays a crucial role in allocating resources efficiently.
- Through the price mechanism, resources are allocated to the production of goods and services that are in demand by consumers.
- If there is a high demand for a particular product, prices will rise, signaling producers to allocate more resources to its production. Conversely, if there is low demand, prices will fall, indicating producers to reduce resources.

3. Determination of Prices:
- Prices in a market economy are determined by the interaction of supply and demand.
- Supply represents the quantity of goods and services producers are willing to offer at a given price, while demand represents the quantity consumers are willing to buy at a given price.
- When supply and demand are in equilibrium (i.e., they intersect at a specific price), this price becomes the market price, reflecting the value and scarcity of the product.

4. Consumer Sovereignty:
- The market mechanism in a market economy upholds the principle of consumer sovereignty.
- Consumers have the freedom to choose and determine the goods and services they want to buy based on their preferences, needs, and purchasing power.
- Producers, in turn, respond to consumer demand by adjusting their production and innovation to cater to consumer preferences.

5. Profit Motive:
- In a market economy, the profit motive drives the behavior of producers and resource owners.
- Producers aim to maximize their profits by producing goods and services that are in demand and at prices that cover their costs.
- Resource owners, such as labor and capital, are incentivized to supply their resources to the production process where they can earn the highest returns.

In conclusion, in a market economy, the central problems of what to produce, how to produce, and for whom to produce are effectively addressed by the market mechanism. Through the interaction of supply and demand forces, the market mechanism enables the efficient allocation of resources, determination of prices, consumer sovereignty, and the pursuit of profit.

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Book keeping

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