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In a free market economy, the producers of products determine social needs through the use of market signals. The most common of these signals is demand for products. It is often easily visible by what is known as demand-pull inflation, increases in the price of wanted goods due to a lack of supply and the purchaser's willingness to pay more for the product to guarantee himself access to it. This sends a signal to producers of the good that they can maximize their profits by allocating further resources to producing the good being demanded as opposed to other possible products.
As production increases, the price level of the product in question ultimately settles at a new equilibrium point (the point at which supply equals demand) and both consumers and producers are content.
When goods compete, these signals determine which product 'survives', as with VHS/BetaMAX and HD-DVD/Blu-Ray. The more heavily demanded good acquires more market share until it is unprofitable to manufacture the less heavily demanded good and ultimately it is phased out. As actors in an economy will undoubtedly pursue the better of products, this encourages innovation and development of new and better products to compete with those that currently dominate the market landscape.
Production is pursued in a manner which ensures the least waste and maximizes efficiency, as to therefore maximize profit. The consumers, those for whom the goods are produced, are catered to by the producers, and are generally anyone who has goods/currency to exchange for the products they desire.