Chapter 13: Market Economic System Flashcards
Private sector
Business organisations which are owned by shareholders or individuals. These organisations respond to changes in market forces and are profit motivated.
Public sector
Controlled by the government. It covers government-run services and state-owned enterprises (SOEs), also called nationalised industries.
State-owned enterprises
Organisations owned by the government which sell products.
Privatisation
The sale of public sector assets to the private sector.
Supply and demand
Resources move automatically as a result of changes in price. In turn, price changes are determined by the interaction of demand and supply. The use of resources is changing all the time in response to changes in consumer demand and the costs of production. Resources move towards those products whose demand is rising and away from those which are becoming less popular.
The importance of competition and incentives
- Consumers have a choice of producers
- Increases the prospects of consumers deciding what is made, with producers competing with each other to meet their demands.
- Consumers are “sovereign.”
- Results in low prices.
-The more successful a firm is in keeping its costs low and the more it targets the desires of consumers, the more efficient it is said to be. - Entrepreneurs, who are quick to pick up on changes in consumer demand, are likely to earn high profits. T
- hese provide them with the incentive and ability to innovate and expand.
- In contrast, those entrepreneurs who are unresponsive to changing consumer demand are likely to suffer losses.
-In labour markets, workers increase their chance of earning high wages by developing those skills which are in high demand, working hard, accepting more responsibility and by being willing to change their nature and place of work.
- Those who are not prepared (or able) to work, who lack the appropriate skills and who are geographically, or occupationally, immobile may receive no or low incomes.
The advantages of a market economic system
- Consumers have power to determine what is produced.
- Resources should change automatically and quickly to reflect changes in consumer demand.
- Choice. Consumers can choose which products to buy and which firms to buy from. Firms can also decide what they want to produce and workers can choose who to work for.
- Cost and prices may be low. The profit motive and competition promote efficiency. Those firms which produce at the lowest costs, and so which are able to charge the lowest prices, are likely to sell more and earn more profit.
- Quality may be high. Market forces can promote the improvement of methods of production and a rise in the quality of products made. It does this by putting competitive pressure on firms, and by providing them with the profit incentive to try to gain more sales by making their products more attractive to consumers.
The disadvantages of a market economic system
- Market failure with market forces failing to ensure the maximum benefit for
society. - Consumers and private sector firms may only take into account the costs and benefits to themselves, and not the costs and benefits of their decisions to others.
- Competition between firms should ensure eff iciency but, in practice, there may be little competition. A market may become dominated by one or a few firms. These firms have considerable market power leading to limited or no choice for consumers. They can raise the prices of their products and produce poor quality products, as people have no choice but to buy from them.
- Even when there is competition and firms want to respond to desires of consumers, they may not be able to do this. This may be because they cannot attract more workers as workers lack the right skills or are geographically immobile
- Firms will not make products unless they think they can charge for them. People can act as free riders. They can benefit from the product even if they do not pay for it. When it is not possible to exclude non-payers, private sector firms do not have the financial incentive to produce the product.
- Advertising can distort consumer choice. It can persuade people to buy products they would not otherwise have wanted or encourage them to buy larger quantities. Consumers and producers may also lack information and hence may make inefficient choices.
- Can also result in what may be regarded to be inequitable (unfair) outcomes. In a market economic system, some consumers will have a lack of income. There can be a very uneven distribution of income, with some people being very rich, and others being very poor. The sick and disabled may find it difficult to earn income.
- Differences in income will increase over time. Those earning high incomes can aff ord to save and buy shares. Their savings and shares will earn them interest and dividends (a share of profits). In contrast, the poor cannot aff ord to save. The children of the rich will be more likely than the children of the poor, to earn high incomes.
Allocative efficiency
When resources are allocated to produce the right products in the right quantities.
Productive efficiency
When products are produced at the lowest possible cost and making full use of resources.
Dynamic efficiency
Efficiency occurring over time as a result of investment and innovation.
