Market Economies

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The type of economic system a country chooses attempts to answer the three economic questions of What to produce? How to produce and for whom to produce it?

In a market economy, the free interaction of supply and demand establish an equilibrium price and quantity. There is no government intervention.  Factors of production are owned privately and consumers and producers act in their own self interests.

What to produce? The price system determines what is produced in a market economy.  High demand increases prices.  The incentive of making a high profit from producing these goods causes producers to allocate more resources towards the production of these goods.  This ability of consumers to determine how resources are allocated (and hence what goods are produced) is consumer sovereignty.

How to produce? Because there is incentive for firms to earn high profits, producers want costs to be as low as possible.  Thus, they will produce using the cheapest combination of factors of production.  In some industries (such as car…

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