Chapter 2.3, Problem 2R

To determine

To analyze the major goals of market economy.

Explanation of Solution

Within a market economy most economic decision-making is achieved through voluntary transactions with supply and demand rules.A market economy is essentially one in which entrepreneurs are free to manage and organize productive capital to achieve profit by producing outputs that are more valuable than the inputs they use and are free to fail and leave the company.

The major role of market economy is shown in the diagram below:

  

(1) Economic freedom: Free market economy ensures anyone will take part in it. The decision to produce or use a given input is entirely voluntary. It means businesses or individuals may manufacture or buy as much or as little of a product as they wish.

(2) Price stability:Everybody works in this market for their profit motive because of which competition is preserved in the market which leads to price stability.

(3) Optimal Resource allocation: There is immense competition between firms in this industry, as the resources are used very carefully and in the most productive way.

(4) Financial stability: Brokerages and banks work to provide the means for individuals and companies to exchange goods and services, and to provide investment services. Financial institutions then make a profit by paying transaction or interest rate costs. So, in the global economy, the stock market grows.

(5) Economic equity: All individual and business are responsible for its gains and losses in this market. Therefore, the actions of individual firm and individuals are directly related to the income they will reap from their economic activities.

(6) Economic efficiency:Throughout this economy, the profit-making companies separate employees according to their skills, as a result of which the time taken to do a specific job is decreased and the amount of goods and services per worker is therefore increased.