AP ECONOMICS Topic : Market economic system | features, advantages and disadvantages

Market Economic System

The central thought of this system is that it should be the producers and consumers who decide how to utilise the resources. Thus, the market forces decide what to produce, how much to produce and for whom to produce.

Features

• All resources are privately owned by people and firms.
• Profit is the main motive of all businesses.
• There is no government interference in the business activities.
• Producers are free to produce what they want, how much they want and for whom they want to produce.
• Consumers are free to choose.
• Prices are decided by the Price mechanism i.e. the demand and supply of the good/service.

Advantages

• Free market responds quickly to the people’s wants: Thus, firms will produce what people want because it is more profitable whereas anything which is not demanded will be taken out of production.
• Wide Variety of goods and services: There will be wide variety of goods and services available in the market to suit everybody’s taste.
• Efficient use of resources encouraged: Profit being the sole motive, will drive the firms to produce goods and services at lower cost and more efficiently. This will lead to firms using latest technology to produce at lower costs.

Disadvantages

• Unemployment: Businesses in the market economy will only employ those factors of production which will be profitable and thus we may find a lot of unemployment as more machines and less labour will be used to cut cost.
• Certain goods and services may not be provided: There may be certain goods which might not be provided for by the Market economy. Those which people might want to use but don’t want to pay may not be available because the firms may not find it profitable to produce. For example, Public goods, such as, street lighting.
• Consumption of harmful goods may be encouraged: Free market economy might find it profitable to provide goods which are in demand and ignore the fact that they might be harmful for the society.
• Ignore Social cost: In the desire to maximise profits businesses might not consider the social effects of their actions.