market econkic system 2.9

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7 Terms

1
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Market economic system characteristics

  1. All economic decisions are made by private sector firms and individuals , no government intervention

  2. All resources are privately owned

  3. Scarce resources are allocated through price mechanism , where prices are determined by supply and demand

  4. Everyone is motivated by self interest (consumer = satisfaction , producer = profit)

  5. Firms compete w one another in order to make most profit

  6. Consumer sovereignty (consumers have the power to influence and determine the types of goods and services produced

2
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As a regulator what limited role does the government play

government may have some basic laws and regulations to ensure that the market is working properly, no cheating

3
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As a consumer what limited role does the government play

Government may buy certain goods and services from private firms for their day to day operations

4
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As a producer what limited role does the government play

Government may employ factor of production to provide certain basic and essential government services (eg,policing services , immigration services )

5
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Advantages of market economic system

  1. Wide Variety of goods and services will be produced (due to consumer sovereignty)

  2. Firms will respond quickly to changes in consumer wants and spending patterns (cause they are profit motivated, scarce resources not wasted)

  3. Firms will develop new and better products (profit motivated)

  4. Firms will develop more efficient methods of production (more efficient and less wastage)

  5. There will be limited or no taxes (consumers have more disposable income to spend on what they want )and regulation (benefits of no indirect tax and regulations for firms production cost kept lower )

6
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Disadvantages of market economic system

  1. Since private firms and consumers aim to maximise their self interest . This can result in an undesirable market outcome. Lead to market failure

7
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What happens in a free market

  1. Public good will not be produced

  2. Some infrastructure will not be built

  3. Merit goods will be under produced and under consumed

  4. Harmful demerit goods lead to over produced and over consumed

  5. Resources may be left unemployed

  6. Firms may ignore external cost