Question

1. Briefly explain why the market system is considered an organizing mechanism.

2. How does "consumer sovereignty" determine the types and quantities of the goods produced in a market economy?

Answer 1

1.

Market system is considered to be an organizing mechanism, because each market system has its own characteristics and on the basis of it, economic decisions are taken and resources, capabilities and capital are organized. For example, in the monopolistic market system, firms can leave and join the market on the basis of demand forces, but economic decisions are focused on product differentiation. So, organizing mechanism works to produce differentiated goods, though at an inefficient level. So, it is the market system, that is acting as an organizing mechanism.

2.

It is the consumer sovereignty that makes consumers to freely express their needs and wants and make their demand of what do they want at each price level. On the basis of these demand inputs, firms take decisions regarding what to produce and how much to produce so that demand is satisfied without making over production.

So, it is the consumer sovereignty that is dictating the type as well as quantities of products to be produced as it is indicated by the demand forces.