ABSTRACT
In free market economies, acting of their own free will, buyers and sellers create the demand and supply in markets. Demand and supply determine the equilibrium price, which clears the market. The economy is guided by these equilibrium prices. Market economy's principles provide correct guidance to the economy only when all the costs and benefits are fully reflected in market prices. Costs and benefits are costs and benefits that accrue to buyer and seller and also the costs and benefits to society resulting from production and consumption of goods. According to the demand and supply rule in the capitalist system, those who supply goods and services to the market sell their goods and services until the cost of the last unit to be sold is equal to the revenue to be gained from that sale. In the capitalist system, production costs consist of the payments which are made to the factors of production.
