Question

1. What is the market economy? How do the financial markets interact with product

and labor markets to allocate scarce resources efficiently in the market economy?

Answer 1

Answer-

Market economy is the an economic system where the decision making for investing. production of goods and the distribution network are primarily driven by pricing signals according to the demand and supply forces in the market.

Financial markets in general provide capital and facilitates the production of products needed by the consumers. The firms have different ways to raise the capital through financial markets like issuing stocks through primary market or secondary markets and issuing bonds.As the pricing of the product primarily depends on supply and demand as well as the competitors. These help the market economy to decide the requirement of capital based on supply and demand forces and work efficiently.

Financial markets play important role in mobilizing the labor markets where there individuals who saves the money contributes to the supply of the money and an individual who borrows contributes to the demand of money. The financial markets signal the demand for any sector or the firm and helps in deciding the wages of the labor force s per the supply and demand. As the prices increases and the demand is still high the firms fixes wages that are higher than regular times. The improvement in profitability increases the stock price of firm and allocates more incentives to employees as a share of profits.