chapter 3: The market system

Question 1

define a pure market economy and give examples of other names for this

Answer 1

In a pure market eco (laissez-faire, capitalist, free enterprise), all major eco decisions are made by individuals and priv firms without any gov intervention

Question 2

define a centrally planned eco

Answer 2

A market under gov supervision or intervention with little interference from individuals

Question 3

define price mechanism and factor markets giving an example relating back to price mechanism

Answer 3

price mechanism is the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced. Factor markets are where factors of production are bought or sold eg demand for sunglasses go up due to sunny weather, need to produce more, therefore for supplier to give their resources to u and not to the production of other goods, u would have to offer higher prices hence price mechanism influences allocation of resources

Question 4

identify the things needed for a market to even exist (characteristics of a market economy)(PCFC)

Answer 4

priv ownership of property
consumer sovereignty
freedom to enterprise
competition

Question 5

outline the characteristics of Priv ownership of property

Answer 5

priv ownership of property - ind have rights to own means of production (resources) and can use this to derive income/wealth. They have the right to sell their property or transfer ownership on whatever terms they choose

Question 6

outline characteristics of consumer sov

Answer 6

consumer sovereignty - Ind have the freedom to choose what they spend their income on in order to satisfy their wants. This determines the answer of what to produce and how much to produce

Question 7

outline freedom to eneterprise

Answer 7

Entrepreneurs are free to utilise their resources however they’d like and are free to set up profit-making activities, to determine what goods/services they produce and how they undertake that production

Question 8

outline competition

Answer 8

competition is the primary regulator that allows price mechanisms to work effectively. Competition means that there is no single individual big enough to influence the market price as to have an advantage over others

Question 9

outline the reasons for gov intervention

Answer 9

Gov are more willing to take more risks and outlay huge capital (priv sector doesn’t have interest in community needs such as roads, parks and national defence bcos they don’t make profit
Governments provide regulations to prevent producers from exploiting consumers with misleading info by agreeing to raise prices
eg price fixing, anti competition and monopoly
Governments attempt to distribute income more evenly eg use tax to redistribute to lower class via social welfare