Question

Write in brief two characteristics of market economy.

Hint:

In a market economy, the interaction of supply and demand sets prices and regulates production, leading to efficient resource allocation and economic freedom.

Answer 1

A market economy is an economic system where the production and distribution of goods and services are based on supply and demand, with little or no government intervention. Below are two key characteristics of a market economy:
Step 1: Freedom of Choice.
In a market economy, individuals and businesses have the freedom to make their own economic decisions. Consumers can choose what to purchase, while producers decide what to produce based on market demand. This freedom leads to competition, innovation, and efficient allocation of resources.

Step 2: Price Mechanism.
The price mechanism plays a central role in a market economy. Prices are determined by supply and demand forces. When demand exceeds supply, prices rise, encouraging producers to supply more. Conversely, when supply exceeds demand, prices fall, encouraging consumers to buy more. This self-regulating system ensures resources are allocated efficiently.