Economics CH13--Market economic system

What is an economic system

It describes the way on which an economy is organized and run, including alternative views of how scarce resources are best allocated.

market economy

• relies on the market forces of supply and demand

• allocate resources with minimal government intervention

• All resources are owned and allocated by private individuals.

• Government tries to create a business friendly environment

• The demand and supply fixes the price of products. This is called price mechanism

• They are motivated by maximising profits

Advantages of market economy

1. Efficiency— competition ensures firms pay attention to the wants of customers, making the market economies more responsive.

2. Freedom of choice—There is no government regulations, so individuals can choose what goods and services they want

3. Incentives- The profit motive creates incentives to work hard, which boosts economic growth

4. wide variety of quality goods and services will be produced as different firms will compete to satisfy consumer wants and make profits.

5. It is easy and inexpensive to start up a business, as there is no tax and regulations

Disadvantages of market economy

1. Income and wealth inequalitites— production is geared to meet the needs and wants of the wealthy as they have more wealth, so the needs of the poor may be neglected

2. Environmental issues— such as resource depletion, pollution

3. Social hardship— Public good like street lights, public roads and national defence may not be provided

4. Wasteful competition— Firms may use unnecessary resources like excess packaging to gain advantages over their rivals.

5. Monopoly— The firm which is in control could charge high prices since they are the only producer

Planned economy

• Relies on the government to allocate resources

• What, how and for whom to produce is decided and planned centrally by the government.

• Central government has ownership and control of all the resources.

• Firms aim to produce what the government wants.

Mixed economy

• Is a combination of market and planned economy

• Resources are allocated using price mechanism of supply and demand

• Also government intervention on for whom,what and how production takes place

• Many prices of primary sector goods are allocated by market forces