Question

Explain how the market system provides a strong incentive for technological advance and creative destruction. Within your answer, provide 3 virtues of the market system. How does the circular flow model fit into this discussion?

Answer 1

The free market provides rewards for people or firms who can reduce costs or provide more useful products. Technological advances tend to allow production at lower costs, and to allow production of more useful products.

The market -- defined in a narrow sense -- is both good and bad for technological advances. First, the market is huge, so there are potentially great rewards for making goods cheaper and of higher quality. BUT, since the same idea can be reproduced billions of times, the market will not truly compensate the new idea. For this reason, we also need intellectual property rights, in addition to the Market.

when companies compete fiercely in the global market to satisfy increasing cost and quality conscious and demanding consumers, they seek technological solutions to survive. Necessity for survival becomes the father of technological inventions and so the creativity is destructed.

The 3 virtues of market system.

First, the market system promotes efficient use of scarce resources. Products are produced in the least costly way and the products most desired by society get produced.

Second, the market system provides incentives for continual improvement and innovation. Rewards are given to entrepreneurs, workers, and consumers who attempt to make the best use of scarce resources.

Third, the market system gives great support to individual freedom for producers, consumers, and workers. Each group is able to pursue their own self-interest and thus promote the social interest.

Since, the circular flow model represents how goods, services, and money move through our economy. There are two major actors known as households and firms. Firms offer goods and services for households to consume. They also offer incomes to the households, it fits into this discussion.