Chapter 2.9 Market economy Flashcards
What does the advantages of a market economic system mainly rely on?
competitive pressures
What are the benefits of a market economic system?
Consumer sovereignty
Choice
Low prices
Good Quality
Efficient allocation of resources
Strong incentives
Define consumer sovereignty
The idea that consumer demand ultimately drives decisions made by producers about what to produce and how to produce it
Define price mechanism
The way that prices adjust to maintain/restore equilibrium in a market
Define incentive
A thing that motivates someone to do something
Define market signals
Changes in the market which producers can see and use to gather information about market conditions
(changes in price, changes in consumer habits, changes in the number of firms etc.)
Define market forces
supply and demand (and how they interact)
Define competition
firms compete over prices and quality, workers compete in order to get the best (highest paid) jobs
Define choice
When key decisions are not made by government, individuals can decide what and how much to consume
producers can decide what and how to produce and who to hire
Define efficiency
Using resources in a way that brings about the most
satisfaction/utility/benefits/welfare
e.g
-reducing costs so MORE output can be produced with LESS resources
-Making improvements to the production process over time
-Ensuring that the economy producing the ‘right’ goods and services and allocates them to the ‘right’ people.
In a market economic system, consumers are _________ which leads to an ___________ allocation of resources because ________________
sovereign
efficient
markets can quickly respond to reflect changes in consumer demand
What is the private sector?
business organisations which are owned by shareholders or individuals
respond to changes in market forces and are profit motivated
What is the public sector
Controlled by the government- covers government run services and state-owned enterprises (SOEs), also called nationalised industries.
The government’s priority may be to promote the welfare of the country’s population
Define state owned enterprises
Organisations owned by the government
Entrepreneurs who respond to consumer demand by _____________ will be rewarded with _________ conversely, entrepreneurs who do not will be punished with _________
selling what consumers demand
profits
losses
consumer sovereignty also means that more resources are directed towards ___________ and reallocated away from ___________
goods and services that are in high demand
those that are less desired by consumers.
What does actual competition refer to
existing rival firms in the market
what does potential competition refer to?
The possibility of new market entrants
If a firm is charging high prices, consumers will _________ or new producers can __________ similarly, if a firm is producing a poor quality product _________ This means that firms have the Incentive to _________
demand less of the product or look for alternatives
enter the market and offer lower prices
demand will decrease or consumers will switch to better alternatives.
maintain competitive prices and improve quality
In order to keep prices low, firms will try to increase _______ and ________ which improves_________
efficiency
productivity
cost-effectiveness and competitiveness.
In a market economic system, decisions are made by _________ in response to _________ not by the government through _________
individuals and firms
the price mechanism
central planning
Consumers choose to consume things that maximise their __________
utility/satisfaction
Producers choose to produce things that they think will_________ and therefore enable them to __________
generate high demand
maximize profits.
Producers have the choice in the labour market. They can choose ________
Which goods or services to produce and how to allocate resources
Private enterprises have _________ incentive
profit
What are the disadvantages of market economy
unequal and inequitable distribution of resources
Market failure:
-Immobility of resources
-failure to take account of full costs/benefits -> over/underconsumption of goods
-Lack of competition (monopoly power)
-Lack of information
What does unequal and inequitable distribution of resources refer to?
It refers to the unfair allocation of wealth and income inequality, where certain groups (e.g., sick, disabled) struggle to earn. This leads to a poverty trap, with limited access to opportunities, reinforcing social and economic disparities.
When does allocative efficiency occur
when resources are allocated in a way that maximises consumer utility
When is a firm said to be productively efficient?
when it produces at the lowest possible cost per unit. A firm has both and incentive and a threat of punishment which drives it towards being p.e
What does dynamic efficiency refer to
Efficiency occurring over time as a result of investment and innovation
How may consumers benefit from profits earned by a firm?
Consumers may benefit from profits earned by a firm through lower prices, improved product quality, and innovation. Profitable firms can reinvest in better services, expand production, or offer discounts, enhancing consumer choices and satisfaction.
