(1) What is the market economy? How do the financial markets interact with product and labor...

(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?

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Expert Solution

Market Economy is an economic model in which the decision regarding production, investment and consumption depends upon the market prices. The market prices in turn depends on the supply and demand factors.

The product market refers to the marketplace where the final goods and services are being for purchase or sale by market participants i.e. business and public enterprises. Labor market refers to interaction of workers and the employers which in turn determines the wage level of labors in particular industry.

In an economy the resources be it capital or labor are always scarce. In market economy the capital will be allocated to those product where there will be more demand than supply. As a result there will be more allocation to labor in those sector/industries. The capital will flow away from product/ industries where there is less demand and as a result there will be less labor demand.

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