Answer to Question #250566 in Economics of Enterprise for banna

Question

how are resources allocated with in a market economy

Answer 1

Solution:

A market economy is a structure in which prices and output of goods and services are determined by market forces such as supply and demand. A market economy, in other words, discourages government intervention in the market.

Therefore, in a market economy, prices determine how resources are allocated. A market economy is self-regulating in this way, allowing real-time coordination across millions of goods and services without any central authority knowing and setting all prices.

Prices provide financial incentives such as profits and losses to influence behavior in the use of resources and the products that result from them. Profits motivate people to produce more of the desired product, and profits are frequently the focus of most people.

But, more importantly, losses force producers to stop producing products that consumers do not want. Losses prevent the inefficient use of scarce resources, allowing those resources to be put to better use elsewhere.