By matching sellers & buyers or supply & demand in each market, a market economy simultaneously solves the three problems of what, how and for whom. Here is an outline of market equilibrium of prices & production:
1. What goods and service will be produced is determined by the dollar votes of consumers not every 2 or 4 years at the polls, but in their daily purchase decisions. The money that they pay into payrolls, rents and dividends that house holds receive as income.
2. How things are produced is determined by the competition among different producers. The best way for producers to meet price competition and maximize profits is to keep costs at a minimum by adopting the most efficient methods of production. Sometimes change is incremented and consists of little more than thinking with the machinery adjusting the input mix to gain a cost advantages, which can be very important in a competitive market.
3. For whom things are produced who is consuming and how much – depends, in large part, on the supply and demand in the markets for factors of production. Factor markets determine wage rates, land rates, interest rate and profits. Such prices are called factors prices. by adding up all the revenues from factors, we can calculate the persons market income. The distribution of income among the population is thus determined by the quantity of factor services and the prices of the factors.
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