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GS Economy Economic Concepts
Q.

With reference to market economy, consider the following statements:

1. All economic activities are organised through the market.

2. In a market system, all goods or services come with a price.

3. Information about how much and what to produce is provided by the government.

Select the correct answer using the code given below:
Explanation:

ANSWER: (B) 

Statement 1 is correct.

  • In contrast to a centrally planned economy, in a market economy, all economic activities are organised through the market. 
  • A market, as studied in economics, is an institution which organises the free interaction of individuals pursuing their respective economic activities. 
  • In other words, a market is a set of arrangements where economic agents can freely exchange their endowments or products with each other. 
  • It is important to note that the term ‘market’ as used in economics is quite different from the common sense understanding of a market. 
  • In particular, it has nothing as such to do with the marketplace as you might tend to think of. 
  • For buying and selling commodities, individuals may or may not meet each other in an actual physical location. 
  • Interaction between buyers and sellers can take place in a variety of situations such as a village- chowk or a super bazaar in a city, or alternatively, buyers and sellers can interact with each other through telephone or internet and conduct the exchange of commodities. 
  • The arrangements which allow people to buy and sell commodities freely are the defining features of a market. 

Statement 2 is correct but Statement 3 is not correct.

  • For the smooth functioning of any system, it is imperative that there is coordination in the activities of the different constituent parts of the system. 
  • Otherwise, there can be chaos. You may wonder as to what are the forces which bring the coordination between the activities of millions of isolated individuals in a market system. 
  • In a market system, all goods or services come with a price (which is mutually agreed upon by the buyers and sellers) at which the exchanges take place. 
  • The price reflects, on an average, the society’s valuation of the good or service in question. 
  • If the buyers demand more of a certain good, the price of that good will rise. This signals to the producers of that good that the society as a whole wants more of that good than is currently being produced and the producers of the good, in their turn, are likely to increase their production. 
  • In this way, prices of goods and services send important information to all the individuals across the market and help achieve coordination in a market system. 
  • Thus, in a market system, the central problems regarding how much and what to produce are solved through the coordination of economic activities brought about by the price signals. 

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