Market Systems
...ition helps producers to produce goods at the lowest cost possible and helps consumers to buy goods at the best value for their money. For competition to take place in a market system there must be a large number of independent buyers and sellers, and the freedom for those buyers and sellers to leave and enter the industry as they see fit, that is, no barriers to entry. Adam Smith is the book, “Wealth of Nations” stated that private individuals maximizing their self-interest will achieve for the economy. He also said that government should not interfere with the market and that market forces work as an invisible hand to achieve maximum social welfare for the nation. The market economy coordinates the factors’ market and the goods’ market, telling what to produce and the price. The price system gives values to our resources and guides our decisions. The market system is explained via the price mechanism, because prices determine what is produced. The price mechanism is the process by which a market solves a problem allocating resources, especially that of deciding how much of a good or service should be produced, but other such problems as well. The price mechanism is an alternative, for example, to having such decisions made by government. Adam Smith stated that government should work under the principle “Laissez-faire”, which when translated means, “leave well alone”. What he meant by that was that the government should leave the invisible hand of market forces to determine prices. It was his opinion that the job of the government should entail restricting the growth of monopolies, protecting the rights of citizens and defending the country from invaders. The market system functions automatically, there is no need for costly bureaucracy. The market can respond more quickly to changes in demand and supply than the government is able to. Competition keeps prices down and acts as an incentive for firms to be efficient. Theoretically, using the market system free of government intervention will result in private gain for the good of society, but in practice, this may fail. This is because the market will not produce public goods and many merit goods. A public good is a commodity or service whose benefits are not depleted by an additional user and from which it is generally difficult or impossible to exclude people, even if the people are unwilling to pay for the benefits. Public goods are unable to be marketed. A merit good is a commodity or service that the government deems good for society, but if society is left to itself, it will not necessarily purchase the good. Some merit goods may be marketed. The market may fail also because competition among firms may be limited because few firms may dominate the market, resulting in high prices and making super-normal profit. They may advertise and sway consumers to buy goods. This leads to economic inefficiency. Other reasons for the market failing include firms being created that are not socially desirable, macro-economic instability and the property and power being unequally distributed r...