Market system

Question 1

Free Market Economy

Answer 1

• decisions of individual households and firms

- determine allocation of resources

Question 2

Key features of free market economy

Answer 2

1. Private ownership of FOP
2. Freedom of choice and enterprise
3. Self interest motive
4. Economic rivalry/competition
5. Price mechanism/invisible hand

Question 3

Private ownership of FOP

Answer 3

• LLCE
• privately owned and managed
• by individuals or institutions
• own personal gains

Question 4

Freedom of choice and enterprise

Answer 4

• individual (consumer/producer) make economic decisions
• consumers free to buy what they want
• consumer sovereignty prevails as gds&svs produced according to their demand
• producers free to buy and use resources to produce whatever products they desire
• sell in markets of their choice

Question 5

Self interest motive

Answer 5

• motive for economic activity
• firms maximise profit
• consumers maximise satisfaction

Question 6

Economic rivalry

Answer 6

• competition
• market of gds& svs, FOP, resources
• gd market: producers compete to win consumer choice (advertise, reduce price, improve quality)
• labour market: frims compete for workers, offer higher wages