Market economic system
The market economic system
- In a market economy, the price mechanism makes all the choices — no government planning.
- (The opposite is a planned economy, where the government decides.)
Practice
In a market economy, decisions about what to produce are made by:
A market economy relies on prices to allocate resources; a planned economy uses government decisions.
Advantages and disadvantages
- Advantages: prices guide resources without planning; firms compete (lower costs, new goods); wide consumer choice.
- Disadvantages: useful but unprofitable goods aren't made; the rich do well while the weak may get nothing; markets can fail.
Practice
An advantage of the market system is that:
Competition drives efficiency and innovation; but some goods are missing and inequality can result.
Practice
A disadvantage of the market system is that some useful goods are not made because they earn no profit.
The market only makes profitable goods, so public goods and some merit goods are under-provided.
You've got it
Key idea
- a market economy lets the price mechanism decide (no planning)
- + efficiency, competition, choice; − missing goods, inequality, market failure
- the opposite is a planned economy (government decides)