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GS Economy Economic Concepts

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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:

(A)

1 only

(B)

1 and 2 only

(C)

2 and 3 only

(D)

1, 2 and 3

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.