1.4.1 Market Economy

Question 1

Meaning of economic system

Answer 1

A system by which an economy allocates its scarce resources in production of various goods and services to satisfy the needs of a society

Question 2

Meaning of market economy

Answer 2

An economic system where economic resources are allocated by price mechanism with minimal government interventions

Question 3

Meaning of price mechanism

Answer 3

A system of buying and selling goods and services that is not under the control of the government

Question 4

Characteristics of market economy

Answer 4

1. Private ownership of resources
   - every individual in the country has a right to acquire resources
   - there is no restriction on the number of property each individual or firm can own
2. Motivation
   - motivated by self interest
   - consumers aim to maximise their individual welfare while producers aim to maximise profit
3. Competition
   - highly competitive among the firms to obtain the highest profit
   = competition drives innovation, efficiency and lower prices

Question 5

Advantages of market economy

Answer 5

1. Economic efficiency
   - competition and profits motive helps to promote an efficient allocation of resources
2. Consumer sovereignty
   - consumers have the power to decide what goods and services are produced based on their purchasing power
3. No bureaucracy

Question 6

Disadvantages of market economy

Answer 6

1. Increase in negative externalities
   - As the objective of firms is to maximise profits, firms in a market economy may prioritise cost cutting measures when they produce their products over environmental protection, leading to practices that harms the environment
2. Monopoly power established
   - In absence of regulations, firms can gain excessive market power especially when the size of the firms gets bigger
   - bigger firms are able to produce their products at a lower cost
   - bigger firms enjoy economies of scale will force out smaller firms from the industry and establish their monopoly power
3. Public welfare ignored
   - market economy does not promote the welfare of the people
   - self interest entrepreneurs will not want to undertake projects which will not maximise their profits
   - merit goods may not be provided adequately due to information failure
4. Inequality of distribution of income and wealth
   -Those who have wealth can obtain resources and start business while the poor have only their labour service to offer
   - the rich will have a greater say in deciding what to produce due to price mechanism
   - the rich get richer and the poor get poorer

Question 7

Meaning of negative externalities

Answer 7

Negative effects caused to the third party as a result of production and consumption of goods and services

Question 8

Allocation of resources in a market economy

Answer 8

What to produce =
Decision of production is determine by consumer demand as there is consumer sovereignty

How to produce=
Firms will adopt the lowest cost technique of production to minimise cost of production and maximising profits

For whom to produce=
Those who have more income or wealth can afford to buy more. The market decides the allocation of goods based on individual ability and willingness to pay for them.