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Frequently Asked Questions - market economy

FAQs - market economy

Advantages of a market system

  • resources are allocated through the price mechanism (‘invisible hand’)
  • consumers said to be sovereign
  • economy is very responsive to changes in consumer demand
  • choice is provided for
  • competition and the profit motive promote efficiency
  • incentive for entrepreneurs to produce.

Possible explanation could include:

  • goods and services are freely exchanged through a market without the need for government intervention.
  • an equilibrium price and quantity will be established in the market through the interaction of the buyers and sellers.
  • This will determine the allocation of the scarce resources.
  • Price mechanism signals preferences.
  • Profits encourage switching/reallocation of resources and thus an optimum level of efficiency is achieved.

Broadly speaking, an explanation of how market system works on its own through the dynamics of demand and supply in the market.

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