Explain how the following problems of an economy be solved with the help of price mechanism: (i) What to produce ?(ii) How to produce ?

Explain how the following problems of an economy be solved with the he

1.	Explain how the following problems of an economy be solved with the help of price mechanism: (i) What to produce ?(ii) How to produce ?
Answer» Solution :(i) Price mechanism automatically solves the problems of what to produce. Profit motive is the main motive od producers. If demand for a commodity increases, it would increase profit of producers and encourage them to produce more of this commodity. THEREFORE automatically, the commodity that is more in demand would get produced. The opposite happens when demand of the commodity falls. So (a) `UARR` Demand `- uarr` Price, `- uarr` Profits `- uarr` Production (b) `darr` Demand `- darr` Price, `- darr` Profits `- darr` Production (ii) Is the price of labour (wages) and price of CAPITAL (interest) that would HELP the producers in decidingbetween labour intensive and captial intensive technique. In a labout surplus economy, wages would be low, which means less cost of production IMPLYING moreprofits to the producers so he would choose labour intensive technique. In a capital surplus economy, price of capitial being low, the profits would be more, so the producers would choose capital intensive technique.