Chapter 5: Decision Making

Question 1

What is a market economy?

Answer 1

A powerful way to create economic value

Question 2

What are the benefits of market economy?

Answer 2

Maximize efficiency and spur innovations without central planning

Question 3

What are advocates for central planning?

Answer 3

• coordination
• standardization
• control
• economies of scale

Question 4

What are “market failures”?

Answer 4

• economies of scale implying monopoly
• public good
• positive or negative externalities
• set a standard if an industry has positive “network externalities”

Question 5

Friedrich von Hayek argued that markets are more effective than central planning, why?

Answer 5

• a form of collective intelligence
• make better use of local knowledge without decentralization
• prices provide substantial coordination
• provide strong incentives for efficient resource allocation
• encourage innovation and adaptation

Question 6

Why should organizational designs use market mechanisms?

Answer 6

• use of knowledge for effective decision-making
• encourages good coordination (self-organizing)
• provides strong incentives