1. How does the traditional economy and market economy differ in determining what goods to produce?

Question

i need an answer...ASAP

Answer 1

Market Economy:

The functioning of a market economy can best be described with the analogy of the political system of democracy. Market economy may be said to democratize economic decision making by enabling dispersed and participatory decision making through market mechanisms. In freely functioning markets, all transactions are presumed to be voluntary. No one will enter into any transaction which does not benefit him or her in some way. Thus both parties to a transaction must benefit, or the transaction will not take place.

Increasing dollar votes for particular products may be perceived to increase the demands for those items. When the demand for a product increases relative to the supply of it, the price tends to rise in the market for the product.  A rising price signals to producers one of three possibilities: that demand has increased, that supply has decreased, or some combination of the two. A falling price signals a decrease of demand, an increase of supply, or some combination of the two.

Firms find motivation to produce only those goods and services that can be produced profitably, i.e., those for which revenues from sales exceed costs of production. Firms whose managers fail to perceive market realities with respect to their selected product mixes will suffer losses and eventually go out of business. The "what to produce" question is thus answered in market capitalism jointly by consumers in response to price signals, and by producers in response to profit outcomes.

Traditional Economy:

A traditional economy is an economic system in which resources are allocated by inheritance, and which has a strong social network and is based on primitive methods and tools. It is strongly connected to subsistence farming, as well as herding cattle and hunting and gathering. Members of a traditional economy often make their own clothing and tools. If they produce more food than they need, they trade the surplus for goods made by others.

Customs, social norms and traditions as well as limited specialization and little access to credit tends to severely limit the goods produced in a traditional economy.