The decision as how to produce different commodities is also taken by the

The decision as how to produce different commodities

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The decision as how to produce different commodities is also taken by the centralplanning authority. The latter allocates resources and decides which methods ofproduction to employ. What share of the factors of production should be allocated to theproduction of capital goods and what share to the production of consumer goods? Theplanning board lays down two rules for the guidance of plant managers. One, eachmanager should combine productive goods and services in such a manner that theaverage cost of producing a given output is the minimum.Two, each manager should choose that scale of output which equalises marginal cost toprice. He must see to it that the industry produces exactly as much of a commodity as canbe sold at a price which equals the marginal cost. In a socialist economy, raw materials,machines and other inputs are sold by public enterprises at prices which are equal to theirmarginal cost of production. So pricing in a socialist economy is based on the marginalcost pricing like that in a capitalist economy.If the price or cost of a commodity is above its average cost, the plant managers will earnprofits and if it is below the average cost of production, they will incur losses. In theformer case, the industry would expand and in the latter case it would cut down
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production. Ultimately, a position of equilibrium will be reached where price equals boththe average cost and the marginal cost of production.But since goods are produced in anticipation of demand, it is accounting prices which arethe basis of price determination. This, in turn, depends on the process of trial and errorwhich necessitates small adjustments in prices from time to time.The problem for whom to produce is also solved by the state in a socialist economy. Thecentral planning authority takes this decision at the time of deciding what and how muchto produce in accordance with the overall objectives of the plan. In making this decision,social preferences are given weight-age. In other words, higher weight-age is given to theproduction of those goods and services which are needed by the majority of the peopleover luxury items.They are based on the minimum needs of the people, and are sold at fixed prices throughgovernment stores. Since goods are produced in anticipation of demand, an increase indemand brings about shortages and this leads to rationing.The problem of income distribution is automatically solved in a socialist economybecause all resources are owned and regulated by the state. All interest, rent and profit arefixed by the state and go to the state exchequer. As regard wages, they are also fixed bythe state according to the amount and quality of work done by an individual. Eachindividual is paid according to his ability and work. Economic surpluses are deliberatelycreated and invested for capital formation and economic growth.1.6.3 PRICE MECHANISM IN A MIXED ECONOMYA mixed economy solves the problem of what to produce and in what quantities in twoways. First, the market mechanism (i.e. forces of demand and supply) helps the privatesector in deciding what commodities to produce and in what quantities. In those spheres
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