ThreeQuestions
There are three essential questions or problems that every
economy must find a way to solve, whether it is a small island
economy or a large economy like the U.S.: 1) what is to be
produced, 2) how are those goods to be produced, and 3) for
whom are the goods to be produced? A free market economy
and a command/centrally planned economy offer two
alternative approaches to these questions. In a free market
economy, democracies base their economies on capitalism; most
decisions about what, how, and for whom to produce are made
by individual consumers (those who buy), firms (companies),
governments, and other organizations interacting in the markets.
In a command, or centrally planned economy such as in a
communist or socialist country, most decisions about what, how,
and for whom to produce are made by those in control of the
government. Many economies are mixed, or a mixture of both.
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Key Elementsof a MarketEconoml'
In a market economy, most prices, such as the price of a
computer, are freely determined by individuals and firms
interacting in markets. These freely determined prices are an
essential characteristic of a market economy. The interaction
between the sellers and buyers determines the price. Property
rights give individuals the legal authority to keep or sell
property, whether land or other resources. Moreover, by giving
people the right to the earnings from their work, as well as
letting them suffer some of the consequences, or losses from
their mistake, property rights provide incentives. In a market
economy, sellers have the right to trade at home or abroad. A
market economy also benefits from a marginal analysis in
order to see the pros and cons of continuing or changing a
course of action in a market; do we start making more of an
item or continue to make the same amount?
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Key Elementsof a Market Econom>7?s
17. Which of the following i nece ary in
a well-functioning capi tali t econorny bt1t not in a
cornmand econorny?
(A)
(B )
(C)
D)
(E
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Centralized deci ion 1nak.i11g
Scarcity of re ource
Monopoli
Prot ectio n of property rigl1t
Po itive extemalitie
Key Elementsof a Market Econom>7?s
17. Which of the following i nece ary in
a well-functioning capi tali t econorny bt1t not in a
cornmand econorny?
(A)
(B )
(C)
•
(E
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Centralized deci ion 1nak.i11g
Scarcity of re ource
Monopoli
Prot ectio n of property rigl1t
Po itive extemalitie
Key Elementsof a MarketEconoml'(cont.)
Just because prices are freely determined and people are free to
trade in a market economy does not mean that there is no role
for government. In certain circumstances, called market
failure, the market economy does not provide good enough
answers to the "what, how, and for whom" questions, and the
government has a role to play in improving the market.
However, the government, even in the case of market failure,
may do worse than the market, in which case economists say
there is government failure. An example of government
failure is the U.S. government's inaction during the first few
years of the Great Depression.
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The PriceSystem
In market economies, freely determined prices are essential for
determining what is produced, how it is produced, and for
whom. A market economy uses the price system to solve
these problems. Prices serve as signals about what should be
produced and consumed when there are changes in taste or
changes in technology. Prices provide incentives to people to
alter their production or consumption. Prices also affect the
distribution of income, or who gets what in the economy.
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The PriceSystem
32. Relative to a cornrnand econorny re ources in a
n1arkcteconorny are n1ore commonly allocated by
(A) democratic elections
(B ) government planning
(C) the price ystetn
(D ) established traditions
(E) a sy tern of checks and balance
17. Which of the following i true in a capitali t
econorny?
(A) The factor of production are collectively
(B
(C
(D
(E
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owned.
The factor of production are di tributed
according to needs.
The prices of good and service are usually
determined by the government.
The prices of good and ervice are et o
that an equitable di tribution of private
property is achieved.
Price
rve a incentive for factor of
production to move to the market
where they are rnost valued.
The PriceSystem
32. Relative to a cornrnand econorny re ources in a
n1arkcteconorny are n1orecommonly allocated by
(A) democratic elections
(B) government planning
the price ystetn
(D) established traditions
(E) a sy tern of checks and balance
<
e
17. Which of the following i true in a capitali t
econorny?
(A) The factor of production are collectively
owned.
(B The factor of production are di tributed
according to needs.
(C The prices of good and service are usually
determined by the government.
(D The prices of good and ervice are et o
that an equitable di tribution of private
property is achieved .
• Price
rve a incentive for factor of
production to move to the market
where they are rnost valued.
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