Market Economic System Review

Market Economic System

Definition

• An economic system describes how an economy is organized, particularly in allocating scarce resources.
• Key question: To what extent should government intervene in the economy versus allowing economic agents (households and firms) to operate freely?

Types of Economic Systems

1. Market Economy
   • Relies on market forces of demand and supply in the private sector for resource allocation.
   • Minimal government intervention.
   • Examples: Hong Kong, Singapore, New Zealand.
2. Planned Economy
   • Relies on government allocation of resources in the public sector.
   • Associated with communist political systems aimed at social equality.
   • Examples: North Korea, Venezuela, Cuba.
3. Mixed Economy
   • Combination of market and planned economic systems, where some resources are privately owned and others are government-controlled.
   • Examples: Japan, Italy, Spain.

Key Definitions

• Private Sector: Economic activity by individuals and firms aimed at profit.
• Public Sector: Economic activity involving the government aimed at providing services.

Goals for Students

• Define the market economic system.
• Explain the advantages of the market economic system.
• Explain the disadvantages of the market economic system.

Advantages of the Market Economic System

• Efficiency:
  • Competition leads firms to focus on customer needs and preferences, driving innovation.
• Freedom of Choice:
  • Individuals can choose goods, services, and careers without heavy government regulation.
• Incentives:
  • Profit motive encourages firms; potential for wealth incentivizes hard work, boosting economic growth.

Disadvantages of the Market Economic System

• Income and Wealth Inequalities:
  • Rich have more choices and freedom; basic needs of poorer individuals may be neglected.
• Environmental Issues:
  • Economic growth leads to resource depletion, pollution, and climate change.
• Social Hardship:
  • Lack of government control may mean insufficient public goods and poverty relief relying on charity.
• Wasteful Competition:
  • Firms may waste resources on excess packaging or advertising, and consumers can be exploited by aggressive marketing tactics.

Relevant Activity

• Pester Power:
  • Describes how children influence parents' purchasing decisions through persistent requests.
  • Research examples to share.

Additional Information

• The USA examples a mixed economic system rather than a pure market system as it involves government provision of certain services.

Chapter Review Questions

1. What is an economic system?
2. What are the three main types of economic systems?
3. What are the key features of the market economic system?
4. What are the advantages of operating a market economy?
5. What are the disadvantages of operating a market economy?

Study Tips

• Review Chapters 14 (Market Failure) and 15 (Mixed Economic System) for deeper insight.

Exam-Style Questions

1. Which economic system enables individuals and firms to pursue their own best interests? [1]
   • A. Command economic system
   • B. Free market economic system
   • C. Mixed economic system
   • D. Planned economic system
2. What is an advantage of the market economic system? [1]
   • A. Government provision of essential services
   • B. Incentives to work
   • C. Maximum prices
   • D. Minimum prices

Revision Checklist

• Understand the organization and resource allocation in an economic system.
• Recognize the types of economic systems: market, planned, and mixed.
• Know the advantages: efficiency, choice, and incentives.
• Be aware of disadvantages: inequality, environmental impact, social issues, and competition.