Chapter 13: Market economic system

Question 1

Importance of competition and incentives

Answer 1

• Choice
• Lower prices
• Encourages efficiency by rewarding those entrepreunurs and workers who respond to market signals

Question 2

Advantages of a market economic system

Answer 2

• Very responsive to changes in demand
• Resources change automatically and quickly to reflect changes in demand
• Consumers can choose which products to buy and which firms to buy from
• Costs and prices may be low
• Quality may be high

Question 3

Disadvantages of a market economic system

Answer 3

• Market forces may not work and lead to market failure
• Consumers and private sector firms don’t take into account of the external social costs and benefits
• May be little competition and a market may have a monopoly
• Firms may not be able to respond to demand because they cannot attract more workers as they may be immobile
• Firms will not make public goods
• Advertising can distort consumer choice by persuading people to buy products they would not otherwise have wanted
• COnsumers and producers may lack information and may make inefficnet choices
• Result in inequitable outcomes
• Difference in income will increase overtime