Chapter-13 Flashcards
Market economic system (13 cards)
How do competition and incentives promote efficiency in a market economy?
In a market economy, competition and incentives promote efficiency by providing both rewards and penalties. Entrepreneurs who respond quickly to consumer demand earn high profits, which motivates them to innovate and expand, while unresponsive entrepreneurs face losses. In labor markets, workers can increase their wages by developing in-demand skills, working hard, accepting more responsibility, and being flexible. Those unwilling or unable to adapt may face lower wages or unemployment.
What is the public sector?
The public sector is the part of the economy controlled by the government.
What are state-owned enterprises (SOEs)?
State-owned enterprises (SOEs) are organizations owned by the government that sell products.
What is privatisation?
Privatisation is the sale of public sector assets to the private sector.
What are the disadvantages of a market economic system?
1) Market failure:
Market forces may fail to maximize societal benefits, as consumers and firms may not consider the impact of their decisions on others, such as environmental harm or health issues.
2) Limited competition:
Market power can be concentrated in a few firms, reducing consumer choice, increasing prices, and lowering quality.
3) Inability to meet consumer needs:
Firms may be unable to respond to consumer demand if workers lack the required skills or mobility.
4) Public goods:
Certain products, like defense, may be underprovided due to the free rider problem, where non-payers get benefited without contributing.
5) Distorted consumer choice:
Advertising can mislead consumers, influencing them to buy unnecessary products and services.
6) Inequitable outcomes:
Income inequality can arise, leaving some consumers poor or unemployed, while others accumulate wealth, often passing it to their children.
What are the advantages of a market economic system?
1) Responsiveness to consumer demand:
Consumers have the power to determine what is produced.
2) Efficient resource allocation:
The price mechanism quickly adapts resources to changes in demand, motivating firms and workers to adjust accordingly.
3) Choice:
Consumers and firms have the freedom to make choices, including what to buy and produce.
4) Low costs and prices:
The profit motive and competition promote efficiency, leading to lower costs and prices.
5) High quality:
Competitive pressure and profit incentives encourage firms to improve production methods and product quality.
What is the price mechanism?
The price mechanism is the system by which the market forces of demand and supply determine prices.
What is a free rider?
A free rider is someone who consumes a good or service without paying for it.
What is allocative efficiency?
Allocative efficiency occurs when resources are allocated to produce the right products in the right quantities.
What is market failure?
Market failure occurs when market forces result in an inefficient allocation of resources.
What does it mean for a product to be produced efficiently?
A product is produced efficiently when it is made at the lowest possible cost, utilizing all available resources fully.
What is dynamic efficiency?
Dynamic efficiency occurs over time as a result of investment and innovation.
How do market forces and competition contribute to allocative efficiency?
Market forces adjust prices to eliminate shortages and surpluses, guiding markets toward allocative efficiency. Competition reinforces this process by rewarding firms that efficiently meet consumer demand with higher profits while penalizing inefficient firms with potential business failure. Firms that effectively respond to consumer preferences gain market share and profitability, whereas those that fail to adapt risk losing sales to competitors.
