Lesson 14 — Activity 2:

The Pros and Cons of a Market Economy


Warm Up


There are different advantages and disadvantages of a market economy. You will learn about both in this next activity.



     

As you just learned, a market economy is based on supply and demand, where the prices of goods and services are determined within a free price system. This system encourages economic freedom and was set up so that it would regulate itself where the demand is greatest and it would encourage competition and initiative. There are many advantages and disadvantages of a market economy, which are described briefly below.


Let's take a look at the advantages:


  • In a market economy, companies compete to produce the most and the best type of goods. Each company is always looking for ways to increase their overall effectiveness.
  • Also, because of this competition, companies produce new products and come up with cheaper ways of doing work. This could be considered a disadvantage as well because it can decrease the quality of the product.
  • With different companies competing, there will be a large variety of goods for the customers to choose from.
  • People acquire more technical skills, social skills, and knowledge to keep their companies on top.

Now let's take a look at the disadvantages of a market economy. As you look at these, keep in mind that in a market economy, profits are what matters and the end line for a company is all about money.

The disadvantages include:


  • Companies mistreat their workers, making employees work harder, faster, and longer hours.
  • Again, due to the fact that companies are competing, there will be an overproduction of goods which means there is a lot of unsold, wasted goods and inactive machinery.
  • Unemployment grows.
  • There is a high degree of uncertainty that workers and businesses face as a result of change.
  • It does not provide for the basic needs of everyone in the society (some members are too old, young, or sick to care for themselves).
  • It does not provide enough of the services that are highly valued.
  • Social and economic inequality grow (the rich get richer and everyone else gets poorer).

Self-check!

Try This!

Try the question below on your own first, and then click on the tab to check your answers! You can look back in the lesson to find the answers.

List two pros and two cons of a market economy.



Pros:
  • Companies compete to produce the most and the best type of goods.
  • Companies produce new products and come up with cheaper ways of doing work.
  • There will be a large variety of goods for the customers to choose from.
  • People acquire more technical skills, social skills, and knowledge to keep their companies on top.
  • There is a high degree of individual freedom.
  • There is a low level of government interference.
Cons:
  • Companies mistreat their workers.
  • There is an overproduction of goods, which means there is a lot of unsold, wasted goods and inactive machinery.
  • Unemployment grows.
  • Social and economic inequality grows (the rich get richer and everyone else gets poorer).
  • It does not provide for the basic needs of everyone.
  • It does not provide enough of the services that are highly valued.