The Free Market and Market Forces- Pros and Cons Flashcards
(10 cards)
What determines price and quantity in a free market?
Market forces of supply and demand.
In a free market, what does equilibrium (Q*) represent?
Allocative efficiency—resources are perfectly allocated to consumer demand.
What is the condition for allocative efficiency in a free market?
MPB = MSB = Price (Marginal Private Benefit equals Marginal Social Benefit).
List four pros of a free market using the acronym EPIC.
Efficiency (allocative and dynamic)
Production & innovation through competition
Investment & economic growth
Choice and consumer sovereignty
Why is a free market considered efficient?
It maximizes social surplus and responds quickly to changes in demand.
What is meant by dynamic efficiency?
Efficiency over time—firms invest in innovation and improvements due to competition.
What are three cons or failures of a free market?
Inequality (especially income/wealth)
Overproduction of negative externalities
Market volatility and instability
What is meant by “excessive profiteering” in a free market?
Firms prioritize profit over social welfare, potentially exploiting consumers.
What is creative destruction?
New innovations replace old industries, which can lead to job loss in some sectors.
Why is government failure not a risk in pure free markets?
Because decisions are made by market participants, not the state.
