Question

In a market economy resources tend to be allocated optimally. Discuss how the interaction of consumers and producers makes this happen.

Answer 1

A Market System is a system where buyers and sellers interact without the intervention of government regulations. Inherent in this system is the concept that sellers want to gain maximum price for the goods, services and resources offered and buyers want to receive value for the lowest price. The balance of this relationship leads ultimately to the market equilibrium price. However, important to note in this system is that all factors external to the “Market” have no effect on this relationship that is government regulations or policies. Resources are therefore strictly allocated to the production of those goods which give the sellers maximum return and correspondingly give the consumers the maximum satisfaction of their wants at a market price.

Within the” Market system” resource allocation is heavily dependent on the variations of the price of the resources themselves. Price acts as an indicator to both the consumers and the sellers within the market .

To be explicit given accurate price information the sellers will use high priced scarce raw materials, (e.g copper market) or resources to produce goods of high value. Likewise only those consumers who see benefit in consuming those higher valued goods will demand them therefore achieving balance within the system. Similarly where the price of a readily available resource is low it will be allocated by the resource users for use to produced goods in a lower valued tier and consumer behavior will also react accordingly.

From our examination of the market system and scarce resource allocation within it we have seen why it is believed by some that the market system is the best mechanism for allocating scarce resource.