Because of scarcity every society or economic system must answer these three (3) basic questions:
- What to produce? ➢ What should be produced in a world with limited resources?
- How to produce? ➢ What resources should be used?
- Who consumes what is produced? ➢ Who acquires the product?
How are goods and services distributed in a market economy?
Goods and services are distributed according to how much consumers are willing to pay. Those willing to pay the market rate will be able to get the product, but not those who cannot or will not. Hence, what consumers will buy will depend on what they desire, how much they desire it, and on their income.
How does the government distribute wealth and income?
This is primarily done through taxation and monetary policy that is set by the government. Governments attempt to provide for all of their citizens through these types of policies. Taxation is the primary method used by any government in the redistribution of wealth and income.
How does monetary policy affect the distribution of wealth?
Monetary policy also makes goods cheaper, if the government controls the prices. Taxation is the most direct policy that a government can use in the redistribution of wealth and reducing the incidences of poverty. The money that governments receive from taxation is used to help those that have no means to help themselves.
How are prices determined in a market economy?
A market economy is a system in which the economic decisions and the prices of goods and services are determined by supply and demand. The assumption behind a market economy is that supply and demand are the best determinants for an economy’s growth and health.
Why does the government put money into the economy?
Governments will do this by putting more money into the economy than usual and by lowering the interest rate. This is done in the hopes of spurring economic development and by making business lending easier. Monetary policy also makes goods cheaper, if the government controls the prices.
