In which of the following economies, decisions are taken on the basis of price mechanism?

Both 2 and 3

The correct answer is: Option 4: Both 2 and 3

Here's why:

• Centrally planned economy: In this type of economy, the government makes most economic decisions, including what goods and services are produced, how much is produced, and at what prices. Price mechanism plays a minimal role.

• Free economy and Market economy: These terms are often used interchangeably. They represent economies where the allocation of resources and the prices of goods and services are determined primarily by supply and demand through market forces. This is known as the price mechanism. Only those goods are produced which have demand in the economy. All the products are produced in the economy with the motive of profit maximisation unlike centrally planned economy, where social welfare is given more importance than profit maximisation.