Question

How does a competitive market determine the types of goods and services to produce, the costs to produce those goods and services, and who receives them?

Answer 1

The competitive market determines the types of goods and services to produce, the costs to produce those goods and services, and who receives them with the help of the price system. The price in a competitive market depends on the relative demand supplies for goods and services. Consumers demand goods and services on the basis of the utility they derive from these goods and services. Producers supply these goods on services on the basis of their cost of producing these goods and services. When the consumers and producers freely interact in the competitive market, the price of the goods and services is determined. The price determines which goods are produced. The costs to produce goods and services depend on the factors of production, which is determined by the demand and supply of the factors of production. Lastly, the competitive market also determines who receives the goods. People who have the willingness, as well as the ability to pay for these goods and services, receive these goods and services.