The Market Economy

Question 1

What is a Market Economy?

Answer 1

A market which is determined purely by supply and demand with no government intervention. sometimes called free-market economies or Laisez-faire economies.

Question 2

How is production determined in a market economy?

Answer 2

By consumer preferences

Question 3

Advantages of a Free Market

Answer 3

• Firms are usually more efficient (have to supply where there is demand and are also likely to use scarce resources more efficiently whilst reducing average costs)
• minimises the input of non-elected govt. officials
• some may argue it leads to more personal freedom

Question 4

Disadvantages of a Free Market

Answer 4

• tends to lead to inequality and there is no social security for those with the lowest incomes
• monopolies could exist and then exploit their power in the market
• over consumption of demerit goods -> negative externalities
• merit goods are underprovided - e.g. education
• Public goods are not provided e.g. defence, streetlights

Question 5

What is Government intervention?

Answer 5

When the government intervenes in the market which creates a mixed economy which is the most common type of economy.

Question 6

How is production determined in a mixed economy?

Answer 6

The forces of supply and demand as well as input from the government.

Question 7

What goods are produced in a mixed economy that wouldn’t be in a free market?

Answer 7

Public goods - e.g. defence, police, streetlights

Merit goods - education, healthcare

Question 8

Advantages of a mixed economy

Answer 8

• easier to coordinate resources in a crisis
• ensures everyone can access basic resources as govt. can re-allocate these resources.(compensate for market failure)
• Reduction in social inequality
• Prevention of the abuse of monopoly power

Question 9

Disadvantages of a mixed economy

Answer 9

• governments can also fail - may not know what to produce
• may not necessarily meet consumer preferences
• limits democracy and personal freedom