Economic Systems Questions and Answers

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In a capitalist economy, what is it called when the consumer determines what is made and how much it costs?

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The most likely answer for this is the “invisible hand.”  To the extent that there is a term for this action on the part of the consumer, that is the best one.

In a command economy, it is easy to see how prices are set and how producers know what to make.  All of these decisions are made by centralized governments.  This is a very visible process as it comes in the form of governmental orders.  But this does not happen in a market economy (a capitalist economy is a market economy).  In a market economy, consumers decide what gets made and how much it costs by what they buy.  Someone has an idea about what they would like to make and sell.  They try it out.  If people buy it, they make more.  If people do not buy it, they lower the price.  If people still don’t buy it, they stop making it.  This process happens over and over again for huge numbers of products.  Thus, the “invisible hand” of consumer decisions determines what things get made and how much they will cost.

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