in a market economy who decides what goods and services will be produced?

Expert Solution

Q. In a market economy who decides what goods and services will be produced?

In a market economy, market forces of demand and supply of goods and services decide what goods and services will be produced.Following example will explain how this works:

Consider a producer who grows (produces) apples and oranges. Assume that due to some reason (e.g. increased awareness regarding health, change in taste & preferences, etc.), demand for apples has increased. So, there will be a higher demand for apples and due to shortage of supply, customers will be willing to pay more. Hence, price of apples will increase. Since price of apples has increased, it becomes more profitable for producer to grow more apples by allocating more resources to it (by reducing allocation of resources in oranges). So, producer will grow more apples. Hence, we can see that without any intervention, a market economy has allocated the resources to the production of that good which has higher level of demand, and by that, increased its supply.

Rahul Sunny answered 4 months ago

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