Economy
- Submitted by: geniekeat
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- Category: Politics: Economics
- Date Submitted: 04/03/2014 08:02 PM
- Pages: 8
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CHARACTERISTICS OF THE MARKET ECONOMY
← Limited role for the state
Market economies are characterised by an almost total lack of government intervention. Indeed in a strictly free enterprise economy, the only major role performed by the government would be that of creating a framework of rules or laws within which both private individuals and firms could conduct their affairs. Such rules would be necessary since, in their absence, there would be no protection from such activities as the addition of harmful substances to products, the false labelling of contents, fraudulent behaviour and so on.
← The existence of the profit motive
In making decisions about production, entrepreneurs are guided by the profit motive. In other word, the motivating force for the entrepreneur is assumed to be self-interest, with entrepreneurs producing whatever offers them greatest profit. Because of this, price changes provide signals to producers, and because of the effect of price changes on profit, production react to these signals.
← Consumers’ sovereignty
In capitalism, consumers’ sovereignty plays an important role. Consumers’ tastes and preferences will affect the production of goods and services. Producers have to produce goods and services to meet consumers’ tastes and preferences; otherwise they will be unable to sell what they produce.
← Price system
The price mechanism is a system used to make economic decisions. Price mechanism means the free operation of demand and supply forces without any intervention. All economic processes of consumption, production, exchange, savings, investment and distribution, work under this price mechanism system, which is labelled as the ‘Invisible Hand’ by Adam Smith.
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CHARACTERISTICS OF THE COMMAND ECONOMY
★ Central control and ownership
In command economy, the government intervenes in all aspects of economic activity. Government...
← Limited role for the state
Market economies are characterised by an almost total lack of government intervention. Indeed in a strictly free enterprise economy, the only major role performed by the government would be that of creating a framework of rules or laws within which both private individuals and firms could conduct their affairs. Such rules would be necessary since, in their absence, there would be no protection from such activities as the addition of harmful substances to products, the false labelling of contents, fraudulent behaviour and so on.
← The existence of the profit motive
In making decisions about production, entrepreneurs are guided by the profit motive. In other word, the motivating force for the entrepreneur is assumed to be self-interest, with entrepreneurs producing whatever offers them greatest profit. Because of this, price changes provide signals to producers, and because of the effect of price changes on profit, production react to these signals.
← Consumers’ sovereignty
In capitalism, consumers’ sovereignty plays an important role. Consumers’ tastes and preferences will affect the production of goods and services. Producers have to produce goods and services to meet consumers’ tastes and preferences; otherwise they will be unable to sell what they produce.
← Price system
The price mechanism is a system used to make economic decisions. Price mechanism means the free operation of demand and supply forces without any intervention. All economic processes of consumption, production, exchange, savings, investment and distribution, work under this price mechanism system, which is labelled as the ‘Invisible Hand’ by Adam Smith.
-4-
CHARACTERISTICS OF THE COMMAND ECONOMY
★ Central control and ownership
In command economy, the government intervenes in all aspects of economic activity. Government...