Question

Discuss how resources are allocated in a market economy. Hint: do not take a narrow approach and discuss allocation of resources in one market. Think about the economy as a whole and the role consumers play with their buying decision

Answer 1

In the market economy, resources are allocated by the price system. The price is determined the interaction of demand and supply. Independent consumers demand goods and services on the basis of their utility and producers supply goods and services on the basis of their cost of production. The interaction of market forces of demand and supply help in the determination of the price and the number of goods bought and sold. In the entire process, the consumers make their independent consumption decisions and the producers make their independent supply decisions. The price system dictates which goods demanded and in turn which goods are produces. Resources are allocated accordingly.