Problems of an Economy | ICSE Class 9 Economics Notes

This note covers needs and wants, the meaning and types of resources, why resources are limited and have alternative uses, the basic economic problem of unlimited wants and limited resources, opportunity cost, the Production Possibility Curve, efficient use of resources, the three central problems of an economy (what, how and for whom to produce) and the way planned, market and mixed economies answer them.

What is the basic economic problem?

Everyday life is full of choices. Should pocket money be spent on snacks, or saved for a new pair of shoes? A school library has only five copies of a new storybook, but 20 students want to read it. Who should get the book first?

The students could share the copies, or the school could buy more. Choices like these are not random. They are examples of economic choices that individuals, enterprises (business firms that produce goods or services) and governments have to make.

A market is a place where buying and selling of products and services takes place. It may be a physical market or a virtual one on the internet. Goods are products such as shoes or refrigerators, and services are activities done for others, such as police services.

A farmer must decide which crop to grow, based on the condition of the soil, rainfall and market demand (how much buyers are willing and able to buy). An enterprise may have to choose between employing more labour (workers) or more capital (machines and similar human-made resources). A government must decide whether to spend more on highways or on hospitals.

What are needs and wants?

Needs are essentials such as food, water and shelter. Wants are preferences such as gadgets, vacations or luxury items. Human wants are unlimited and keep changing. People may want to upgrade from a bicycle to a motorbike and then to a car.

Two rows of photographs. The row labelled Needs shows a plate of food, a house, a stack of books, a first-aid box and clothes on display at a stall. The row labelled Wants shows a large building with cars outside, a smartphone, a wristwatch, a red car and make-up items.

See Fig. 8.1 in your NCERT textbook

How do unlimited wants and limited resources lead to scarcity?

Resources are needed to satisfy needs and wants, but they are limited in quantity. The mismatch between unlimited wants and limited resources produces scarcity, and scarcity forces people to make choices. This is why not all wants can be satisfied.

Definition: Scarcity is the position in which unlimited wants meet limited resources, so choices have to be made about how to use the resources.

Scarcity affects households, enterprises and governments alike. Each must decide how best to use what it has. This leads to the three central problems of an economy, which are described below.

What are resources, and what are their types?

Resources are the factors used for the production of goods and services. They are required to satisfy human needs and wants.

Definition: Resources are factors used for the production of goods and services. They can be natural, like water and coal, or human-made, like capital and technology.

What are natural and human-made resources?

Natural resources include water and coal. Human-made resources include capital and technology. Both natural and human-made resources are limited in quantity.

What are the factors of production?

The factors of production are land, labour, capital and technology. Economics books also count entrepreneurship, the organising of production and the bearing of its risks, as a factor of production. They are used to produce goods and services. Labour means the workers used in production. Capital covers human-made resources such as machines and factories. Technology covers the equipment and know-how used in production.

Four pictures sit around a central label, Factors of Production. Land shows green fields, a river, hills and trees. Labour shows a man with two bullocks, other people standing beside him, a person working at a computer and a person in a white coat. Capital shows factory buildings, machinery, power pylons, a road and bags of money marked with the rupee symbol (₹). Technology shows a desktop computer, two robots, satellites and laboratory glassware.

See Fig. 8.6 in your NCERT textbook

Why are resources limited, and what are alternative uses?

Both natural and human-made resources are limited in quantity. Yet a resource can be put to many alternative uses. Money, for example, can be allocated to buy fruit or a pair of shoes.

Households are not the only ones that must decide. An economy is the system of production, distribution, trade and consumption of goods and services within a specific area such as a country. Economies too must decide how to use their scarce resources in the best possible way, to meet unlimited wants and improve people's quality of life.

How does steel show alternative uses?

Steel can be used for medical equipment, for refrigerator manufacturing or for aircraft manufacturing. When one use is chosen, the other uses are given up.

Three photographs captioned Medical equipment, Aircraft manufacturing and Refrigerator manufacturing, with the caption Alternative uses of steel printed below them. The first shows instruments laid out in rows, the second shows the inside of an engine and the third shows a hall with rows of refrigerators.

See Fig. 8.2 in your NCERT textbook

What choices arise from limited resources?

The table lists the situations used as examples, the resource that is limited in each and the alternatives open.

In each row, choosing one alternative means giving up another. The next section gives a name to what is given up.

What is opportunity cost?

When one alternative is chosen, the other options are given up. The value of what is given up is known as the opportunity cost.

Definition: Opportunity cost is the value of what is given up when one alternative is chosen.

Opportunity cost = value of what is given up

How does opportunity cost appear in a farmer's choice?

Imagine a farmer who has a piece of land and can grow either barley or wheat on it. With limited land, water and labour, the farmer must decide how much of each crop to produce.

Growing more barley means giving up some wheat. That wheat is the opportunity cost of growing barley.

Why does opportunity cost matter for decisions?

Every choice involves an opportunity cost, because it means giving up one option for another. Economists study the available alternatives, the opportunity costs linked to them and the potential outcomes. This helps individuals, enterprises and institutions make decisions.

Worked example 1. A student has ₹100 and must choose between buying a notebook or saving the money to buy a tennis racket later. Name the economic concept that explains this situation and state what is given up if the notebook is bought.

Answer: The concept is opportunity cost. If the student spends the ₹100 on the notebook, the option of saving the ₹100 for the tennis racket is given up. The value of that forgone option is the opportunity cost of buying the notebook. If the student saves instead, the notebook is given up.

How does the Production Possibility Curve show scarcity and choice?

Take a farmer with a piece of land who can grow barley or wheat. Because land, water and labour are limited, growing more of one crop means growing less of the other.

The table lists five combinations of barley and wheat that the farmer can grow. Each combination has a letter from A to E, and quantities are in kilograms (kg).

These combinations can be plotted on a graph. The x-axis (the horizontal axis) shows the quantity of barley in kg, and the y-axis (the vertical axis) shows the quantity of wheat in kg. The result is a downward-sloping curve.

The horizontal axis is labelled Barley (in kg) and the vertical axis is labelled Wheat (in kg), each marked at 0, 20, 40, 60, 80 and 100. Five points labelled A to E lie on a curve that slopes downward from A, at the top of the wheat axis, to E, on the barley axis at 100. Faint guide lines run from points B, C and D to the axes, and the area under the curve is shaded blue.

See Fig. 8.3 in your NCERT textbook

What is the Production Possibility Curve?

The curve is called the Production Possibility Curve (PPC). It shows the different combinations of goods that can be produced using all the available resources. For the farmer, it shows the trade-off between barley and wheat: giving up some of one crop to get more of the other.

Definition: The Production Possibility Curve (PPC) is the curve showing different combinations of goods that can be produced using all available resources.

What does the curve tell us?

• As the farmer moves from point A to point E, more barley and less wheat are produced.
• To grow more barley, some wheat must be sacrificed. This is the opportunity cost of growing barley.
• All the points on the PPC show the maximum output that can be produced through efficient use of resources, by avoiding wastage.
• This helps in better planning and decision-making by enterprises and governments.

How is opportunity cost worked out from the table?

The table lets us measure the opportunity cost of moving from one combination to the next. The old point is the combination the farmer starts from, and the new point is the combination the farmer moves to. Two quantities are needed.

Barley gained = barley at the new point - barley at the old point

Wheat given up = wheat at the old point - wheat at the new point

To see how much wheat each extra kilogram of barley costs, divide one by the other (the sign ÷ means divided by).

Wheat lost per kg of barley = wheat given up ÷ barley gained

What do the steps between the points show?

The next table is worked out from the values in the farmer's table above.

Each step adds 25 kg of barley. The wheat given up for those 25 kg is 10 kg, then 20 kg, then 30 kg and then 40 kg. Over the whole move from A to E, 100 kg of barley is gained and 100 kg of wheat is given up.

How are the calculations done?

Worked example 2. Combination A gives 0 kg of barley and 100 kg of wheat. Combination B gives 25 kg of barley and 90 kg of wheat. Find the opportunity cost of moving from A to B.

Answer: Barley gained is 25 - 0 = 25 kg. Wheat given up is 100 - 90 = 10 kg. The opportunity cost of the extra 25 kg of barley is 10 kg of wheat. Wheat lost per kg of barley is 10 ÷ 25 = 0.4 kg.

Worked example 3. Combination C gives 50 kg of barley and 70 kg of wheat. Combination D gives 75 kg of barley and 40 kg of wheat. Find the opportunity cost of moving from C to D.

Answer: Barley gained is 75 - 50 = 25 kg. Wheat given up is 70 - 40 = 30 kg. The opportunity cost of the extra 25 kg of barley is 30 kg of wheat. Wheat lost per kg of barley is 30 ÷ 25 = 1.2 kg.

Worked example 4. A farmer starts at combination A (0 kg of barley, 100 kg of wheat) and decides to produce combination D (75 kg of barley, 40 kg of wheat). How much wheat is given up to obtain the barley?

Answer: Barley gained is 75 - 0 = 75 kg. Wheat given up is 100 - 40 = 60 kg. The opportunity cost of the 75 kg of barley is 60 kg of wheat. Wheat lost per kg of barley is 60 ÷ 75 = 0.8 kg.

How can the curve be drawn from the table?

Draw two axes meeting at 0. Label the horizontal axis Barley (in kg) and the vertical axis Wheat (in kg). Plot the five combinations, label them A to E and join them with a smooth curve that slopes downward from A to E.

Why must resources be used efficiently?

The word economics comes from the Greek word oikonomia. It combines oikos, usually translated as household, and nemein, best translated as management. So economics refers to household management.

When resources are limited and wants are unlimited, not just families but also nations must plan how to use their resources efficiently. Resources have competing uses, so individuals, enterprises and governments must decide how to allocate them. These decisions affect the well-being of people and society as a whole.

What does efficient use mean?

The discipline of economics deals with how choices are made by optimising the use of limited resources to satisfy needs and wants. On the PPC, every point shows the maximum output that can be produced through efficient use of resources, by avoiding wastage. Efficient use therefore means getting the most from the available resources without wasting them.

Who has to allocate resources, and how?

Individuals, enterprises and governments all have to allocate resources, and economists study their choices. The table gives the examples named for each. Profits are what an enterprise has left from selling its products after paying its costs. Revenue from taxation is money the government collects as taxes. Infrastructure means basic facilities such as highways, and welfare programmes are government schemes for people's well-being.

Why do good decisions need data?

Good decisions rely on data, meaning facts and statistics collected for reference or analysis, and not on guesswork. Economists use data from government reports such as economic surveys.

A survey is a systematic method for collecting and analysing data about the economic conditions and behaviours of populations. The economists' analysis helps in understanding potential risks and opportunities.

What is an example of efficient use?

Note: Producers of shoes analyse what consumers (people who buy and use goods and services) like, how much money they have and how much demand there is before deciding what to make. This makes sure that limited resources are used well and not wasted.

What are the central problems of an economy?

Any mismatch between unlimited wants and limited resources gives rise to three key questions that economics seeks to address. These are the central problems of an economy: what to produce, how to produce and for whom to produce.

Every economy faces these three questions in order to decide how best to use its scarce resources.

Two thick arrows, labelled Unlimited Wants and Limited Resources, point down into a box labelled Scarcity. Arrows from Scarcity lead to a box labelled Choices. Three lines run from Choices to three circular photographs: What to Produce (grain and flour in a bowl), How to Produce (a red tractor in a field) and For Whom to Produce (people seated at a table).

See Fig. 8.5 in your NCERT textbook

What does each central problem ask?

What does "what to produce" mean?

This question concerns which goods and services, and in what quantities, should be produced to meet the needs of the economy over a given period. Because resources are limited, producing more of one good can mean producing less of another, as the farmer's choice between barley and wheat showed.

Which crops should farmers produce?

Should farmers produce water-intensive crops such as sugarcane and paddy, or drought-resistant crops such as millets and pulses? The two choices bring different gains.

The opportunity cost of producing sugarcane is the forgone gains from saved water and improved soil health.

This decision reflects a trade-off between short-term economic gains and long-term sustainability, made by accounting for the opportunity costs of the alternatives.

Who else faces this question?

Similar trade-offs have to be made by companies, governments and consumers. A government may ask whether to allocate more funds to healthcare and education or to defence and space exploration. A consumer may choose between snacks and shoes.

Whichever is chosen, the other use of the same resources is given up.

For whom to produce?

The question of for whom to produce concerns the purpose of the goods and services produced, how they are produced and distributed, and who benefits from them.

Resources are limited, and people have different needs, income levels, tastes and lifestyles. Producers (those who make goods and services) therefore decide which group of consumers they want to serve.

How do shoes show the question in practice?

Shoes are a common product, but different types are produced for different groups of people, depending on their needs and purchasing power.

How does the answer affect the materials used?

The decision of for whom to produce also affects the materials used. Leather shoes are generally targeted at office-goers and high-income customers.

Rubber or synthetic shoes are aimed at sports players, factory workers or people who need affordable and durable footwear.

Before deciding what to make, producers analyse what consumers like, how much money they have and how much demand there is. This makes sure that limited resources are used well and not wasted.

How to produce?

After deciding what to produce, the next question is how to produce it: which methods, resources and technologies should be used. For example, a manufacturer must decide whether to automate processes (let machines do the work) or employ more labour.

To answer this question, producers must select the right mix of the factors of production: land, labour, capital and technology.

What are labour-intensive and capital-intensive production?

Labour-intensive production uses more workers and less machinery. Capital-intensive production uses more machines and technology and fewer workers.

Usually, economic activities related to agriculture and handicrafts rely more on labour. Industries such as steel and automobile manufacturing depend more on machinery.

What decides the method of production?

The choice of production technique depends on the cost of capital, the choice of technology and the nature of the product. The availability of the factors of production and their relative cost matter too. So do the laws and regulations of the country.

How does a garment manufacturer decide?

A garment manufacturer must choose between labour-intensive and capital-intensive methods. The table shows how each condition affects the choice.

How do economic systems answer the three questions?

In an economy, the answers to the three questions depend on how the resources used to produce goods and services are organised, and on who controls the decision-making about them.

The system that defines the mechanisms for the production, consumption and distribution of goods, services and resources is known as the economic system of a country. There are three kinds: planned, market and mixed.

What is a planned economy?

In a planned economy, a central planning authority of the government, such as the planning commission, makes all major economic decisions. It decides what and how much will be produced, how, who will get to use the goods and at what prices.

The government owns most resources and sectors such as land, factories, banks and transport. Private ownership is limited, and enterprises usually follow the central authority's targets rather than market demand.

Enterprises are heavily regulated through strict permits and licences (official permissions to produce goods and services). This prevents a large number of enterprises from operating, which restricts competition. As a result, there is little motivation to improve quality or to innovate (bring in new methods or products).

Some examples of planned economies are the former Soviet Union, North Korea and Cuba.

What is a market economy?

In a market economy, the questions of what, how and how much to produce are addressed mainly by the forces of demand and supply, with little government intervention. Demand is how much buyers are willing and able to buy, and supply is how much sellers offer for sale.

Often, the government acts like a referee in a football match. It ensures safety and law and order, and it does not control prices or production.

Factories, shops, land and other resources largely belong to individuals and private companies. Many producers offer similar products, which encourages better quality, lower prices and innovation. Examples include the United States of America, Japan and Hong Kong. However, governments play an important role even in these economies.

What is a mixed economy?

A mixed economy combines features of both market and planned economies. Private individuals, enterprises and the government all play important roles in making economic choices and decisions.

In reality, most economies have features of mixed economic systems, which allow private ownership with some degree of government regulation. Examples include India (post-1991), China (post-1978), Germany and Sweden. Even market economies like the United States of America and Singapore have significant government involvement in the market.

How do the three systems compare?

How has India's economic system changed?

India's economic system has evolved in response to changing needs and challenges. In the decades after Independence, India followed a more state-led approach, similar to a planned economy. The government played a major role in controlling industries, allocating resources and regulating production through licences and permits.

By 1991 the country faced serious economic difficulties. The government then introduced major economic reforms. They reduced excessive regulations, encouraged private enterprise, opened the economy to global trade and investment, and increased competition. These reforms gradually shifted India towards a more market-oriented system, while the government still keeps an important role.

Glossary

• Need — a preference that is an essential, such as food, water or shelter, as distinct from wants such as gadgets, vacations or luxury items.
• Want — a preference such as a gadget, a vacation or a luxury item. Human wants are unlimited and keep changing, as when a bicycle owner comes to want a motorbike and then a car.
• Resources — factors used for the production of goods and services. They can be natural, like water and coal, or human-made, like capital and technology.
• Scarcity — the position in which unlimited wants meet limited resources, which forces choices about how to use the resources.
• Opportunity cost — the value of what is given up when one alternative is chosen over another.
• Production Possibility Curve (PPC) — the curve showing different combinations of goods that can be produced using all available resources. Each point on it shows the maximum output through efficient use of resources.
• Trade-off — giving up some of one good to get more of another, as when a farmer grows more barley and so produces less wheat.
• Economy — a system of production, distribution, trade and consumption of goods and services within a specific area such as a country.
• Labour-intensive production — production that uses more workers and less machinery.
• Planned economy — an economic system in which the allocation of resources and the prices of goods and services are determined by the government.
• Market economy — an economic system in which the allocation of resources and prices are determined primarily by market forces (demand and supply), with little government intervention.
• Mixed economy — a system in which the government and the private sector coexist and compete in the market, with the private players regulated by the government.

Common errors and misconceptions

• Misconception: Opportunity cost is the money paid for something. Correct: Opportunity cost is the value of what is given up when one alternative is chosen over another.
• Misconception: All wants are needs. Correct: Needs are essentials such as food, water and shelter, while wants include gadgets, vacations and luxury items. Wants are unlimited and keep changing.
• Misconception: Only households have to choose how to use scarce resources. Correct: Individuals, enterprises, governments and whole economies all have to decide how to use scarce resources in the best possible way.
• Misconception: Moving along the Production Possibility Curve costs nothing. Correct: To grow more barley, some wheat must be sacrificed, and that wheat is the opportunity cost.
• Misconception: "How to produce" and "for whom to produce" ask the same thing. Correct: How to produce is about methods, resources and technologies. For whom to produce is about the group of consumers who benefit.
• Misconception: Labour-intensive production uses no machines. Correct: It uses more workers and less machinery, while capital-intensive production uses more machines and technology and fewer workers.
• Misconception: The government has no role in a market economy. Correct: The government often acts like a referee, ensuring safety and law and order, and governments play an important role even in market economies.

Exam-style questions with model answers

Q1. A student has ₹100 and must choose between buying a notebook or saving the money to buy a tennis racket later. Define opportunity cost and state the opportunity cost if the student buys the notebook. [2 marks]

1. Opportunity cost is the value of what is given up when one alternative is chosen over another.
2. If the student buys the notebook with the ₹100, the option of saving that money for the tennis racket is given up, so the forgone saving for the racket is the opportunity cost.

Q2. State the three central problems of an economy and the situation that gives rise to them. [2 marks]

1. The three central problems are what to produce, how to produce and for whom to produce.
2. They arise from the mismatch between unlimited wants and limited resources, which creates scarcity and forces choices.

Q3. Steel can be used for medical equipment, for refrigerator manufacturing or for aircraft manufacturing. Using this example, explain why limited resources make choice necessary. [3 marks]

1. Resources such as steel are limited in quantity but can be put to many alternative uses, here medical equipment, refrigerator manufacturing and aircraft manufacturing.
2. When one use is chosen, the other uses are given up, and the value of what is given up is the opportunity cost.
3. So an economy has to decide how to use its scarce resources in the best possible way, to meet unlimited wants and improve people's quality of life.

Q4. A farmer can grow these combinations of barley and wheat, in kg: A (barley 0, wheat 100), B (25, 90), C (50, 70), D (75, 40) and E (100, 0). (a) How much wheat is given up when the farmer moves from B to C? (b) What does this wheat represent? (c) Name the curve that plots the combinations. (d) What does each point on the curve show? [4 marks]

1. Moving from B to C raises barley from 25 kg to 50 kg, a gain of 25 kg, while wheat falls from 90 kg to 70 kg, so 20 kg of wheat is given up.
2. The 20 kg of wheat is the opportunity cost of growing the extra 25 kg of barley.
3. The curve is the Production Possibility Curve (PPC), which shows the different combinations of goods that can be produced using all available resources.
4. Each point on the curve shows the maximum output that can be produced through efficient use of resources, by avoiding wastage.

Q5. Explain the three central problems of an economy, giving one example of each. [5 marks]

1. Unlimited wants and limited resources create scarcity and choices, and these choices give rise to three central problems of an economy.
2. What to produce asks which goods and services, and in what quantities, to produce for the needs of the economy. For example, farmers must decide between water-intensive sugarcane and paddy and drought-resistant millets and pulses.
3. How to produce asks which methods, resources and technologies to use. For example, a manufacturer must decide whether to automate processes or employ more labour.
4. For whom to produce asks which group of consumers the goods will serve and who benefits. For example, school shoes are made for students, office-wear shoes for working professionals and sports shoes for athletes.
5. Answering these questions carefully makes sure that limited resources are used well and not wasted, because every choice carries an opportunity cost.

Q6. A garment manufacturer must choose between labour-intensive and capital-intensive methods. Explain the factors that influence this choice. [5 marks]

1. Labour-intensive production uses more workers and less machinery, while capital-intensive production uses more machines and technology and fewer workers.
2. Cost of machines: if machines are expensive the firm relies more on labour, but if they become affordable it may shift to automation.
3. Level of technology: advanced technology encourages machine use, while limited technology leads to manual production.
4. Nature of the product: customised or designer clothes require skilled labour, whereas mass-produced garments are better suited for machines.
5. Labour and the law: labour-intensive methods are preferred if labour is cheap and easily available, machines become more efficient if labour is costly or scarce, and labour laws or incentives for machinery also influence the decision.

Q7. Distinguish between needs and wants, giving two examples of each. [3 marks]

1. Needs are essentials, for example food and water (shelter is another).
2. Wants are preferences such as gadgets and vacations (luxury items are another).
3. Unlike needs, which are essentials, wants are unlimited and keep changing. For example, people may want to upgrade from a bicycle to a motorbike and then to a car.

Q8. Farmers can grow water-intensive crops such as sugarcane and paddy, or drought-resistant crops such as millets and pulses. Explain the opportunity cost of producing sugarcane. [4 marks]

1. Producing sugarcane yields high profits and supports industries such as sugar.
2. Producing millets and pulses instead would save water, improve soil health and promote sustainable agriculture.
3. Choosing sugarcane therefore gives up those gains, so the opportunity cost of producing sugarcane is the forgone gains from saved water and improved soil health.
4. The decision reflects a trade-off between short-term economic gains and long-term sustainability.

Key takeaways

• Human wants are unlimited and keep changing, while natural and human-made resources are limited in quantity. This mismatch creates scarcity, and scarcity forces choices.
• Resources are factors used for production and may be natural, like water and coal, or human-made, like capital and technology. The factors of production are land, labour, capital and technology.
• Resources can be put to alternative uses. Steel, for example, can go into medical equipment, refrigerators or aircraft, and choosing one use gives up the others.
• Opportunity cost is the value of what is given up when one alternative is chosen. Every choice involves an opportunity cost.
• The Production Possibility Curve shows combinations of goods that can be produced using all available resources. More barley means less wheat in the farmer's example.
• Points on the Production Possibility Curve show the maximum output from efficient use of resources, avoiding wastage. Producers also analyse consumers and demand so that resources are not wasted.
• Every economy faces three central problems: what to produce, how to produce and for whom to produce.
• Methods of production may be labour-intensive or capital-intensive. The choice depends on the cost of capital, technology, the nature of the product, the cost of labour and government rules.
• Planned, market and mixed economies answer the three questions in different ways, and most modern economies combine elements of both market and planned systems.

Test yourself

What is the basic economic problem?

Human wants are unlimited in relation to limited resources that have alternative uses, so scarcity arises and choices have to be made about how to use the resources.

Name two natural resources and two human-made resources.

Water and coal are natural resources. Capital and technology are human-made resources.

A farmer moves from combination D (75 kg of barley, 40 kg of wheat) to combination E (100 kg of barley, 0 kg of wheat). How much wheat is given up?

Barley rises by 25 kg, from 75 kg to 100 kg. Wheat falls from 40 kg to 0 kg, so 40 kg of wheat is given up.

What does the Production Possibility Curve show?

It shows the different combinations of goods that can be produced using all available resources. Each point on it shows the maximum output through efficient use of resources.

What is the opportunity cost of producing sugarcane instead of millets and pulses?

It is the forgone gains from saved water and improved soil health.

Which central problem is addressed when a manufacturer chooses between automation and more labour?

It is the problem of how to produce, which asks which methods, resources and technologies should be used.

Why do producers make different types of shoes?

People differ in needs, income levels, tastes and lifestyles. Producers decide which group of consumers to serve, so different shoes are made for students, professionals, athletes and daily use.

In which economic system are what, how and how much to produce decided mainly by demand and supply?

In a market economy, with little government intervention.