Chapter 13- Market Economic System Flashcards
Public Sector
Public Sector: the part of the economy controlled by the government
State Owned Enterprises
State Owned enterprises(SOEs): organizations owned by the government which sell products.
Privitization
Privatization: the sale of public sector assets to the private sector
Price Mechanism
Price Mechanism: the system by which the market forces of demand and supply determine price
Market Failure
Market Failure: market forces resulting in an inefficient allocation of resources.
Free Riders
Free Riders: someone who consumes a good or service without paying for it
Allocative Efficiency
Allocative Efficiency: when resources are allocated to produce the right products in the right quantities
Productively Efficient
Productively efficient: when products are produced at the lowest possible cost and making full use of resources
Dynamic Efficiency
Dynamic Efficiency: efficiency occurring over time as a result of investment and innovation
Importance of Competition and Incentives
There are a large number of firms producing the same product and hence consumers have a lot of choice. In this case consumers are said to be sovereign as the supply is based on their demand. Competition would also result in lower prices are companies compete to get the greatest demand for their product. The more successful a firm is in keeping its costs low the more it targets the desires of the consumers, the more efficient it is said to be. The market economic system rewards efficiency. Entrepreneurs who are the quickest to pick up changes in consumer demand make the highest profits. In labor markets workers try and earn a better wage by increasing their quality of labor.
Private and Public Sectors
Private and Public Sectors: private sector covers business organizations owned by shareholders or individuals. They respond to changes in market forces and are motivated by profits. Public sector is controlled by the government and covers government run state-owned enterprises(nationalized industries)
Advantages of Market Economic system
- It is very responsive to changes in consumer demand
- Resources change automatically to adapt to changes in consumer demand(Price Mechanism, incentive for resources to move, punishes those who don’t respond to changing demand)
- Consumers have a choice in their products
- Costs and prices may be low
- Quality may be high
Disadvantages of Market Economic System
- Consumers and private firms may only take into account the costs and benefits for themselves
- Competition that increases efficiency is scarce
- Firms may not be able to respond to consumers desires
- Firms wont make products until they think that they think that they can change them
- Advertising can distort consumer choice
- Failing market forces can result in inequitable outcomes
- Differences in income will increase overtime
