Discuss whether the price mechanism is an effective way to solve the basic economic problem.

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The basic economic problem is that of scarcity. Scarcity exists because supply is limited and demand is not. Since our population is always growing and there is no way to calculate how much of any one thing a never-ending population may need, there is no end to the demands our population puts onto our supply of resources. As a result, there is no possible solution—save magic—to the basic economic problem.

The price mechanism is the economic system where the demand for a resource, paired with this availability, determines the price of that resource. For example, if an item is in small supply but high demand, the price mechanism dictates that a seller can ask a higher price for that item. Items in high supply and low demand, on the other hand, would be worth much less.

So, can the price mechanism solve the basic economic problem? No. The price mechanism only does two things:

  1. Ensures that a seller gets paid based on how desirable a product is at any point in time.
  2. Limits the use of items in low...

(The entire section contains 4 answers and 1291 words.)

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