How The Free Market Economic System Solve Fundamental Economic Problem?


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4. The market mechanism allows an economy to simultaneously solve the three economic problems of what, how, and for whom. Consumers indicate their preferences over what is produced through their willingness to pay for a good or service. Firms respond to this by considering the mix of final products that will maximize their own profits, that is, the difference between their revenues from sales and their production costs. This must involve the question how, since firm production costs are determined by the prices of inputs and technology used in the production process. Once these questions have been addressed, for whom is found to be those consumers who have the money to pay for the goods and services produced.

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