What are the two basic assumptions that economists make about individuals and firms? What is the role and significance of prices in the market economy? Prices are light traffic signals in an economy. They self-regulate the economy and are critical to a market. That is why socialism and its attempts to set prices cannot function properly because it never allows for the true price to be discovered. What’s so great about a market economy anyway?
A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand, and the prices of goods and services are determined in a free price system. Competition between different firms leads to increased efficiency, as firms do whatever is necessary—including laying off workers—to lower their costs; Most people work harder (the threat of losing one’s job is a great motivator);
There is more innovation as firms look for new products to sell and cheaper ways to do their work; Foreign investment is attracted as word gets out about the new opportunities for earning profit; The size, power, and cost of the state bureaucracy is correspondingly reduced as various activities that are usually associated with the public sector are taken over by private enterprises;
The forces of production, or at least those involved in making those things people with money at home or abroad want to buy, undergo rapid development; Many people quickly acquire the technical and social skills and knowledge needed to function in this new economy; A great variety of consumer goods become available for those who have the money to buy them; and Large parts of the society take on a bright, merry and colorful air as everyone busies himself trying to sell something to someone else.