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
- 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.
- 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.
- 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.
- The USA examples a mixed economic system rather than a pure market system as it involves government provision of certain services.
Chapter Review Questions
- What is an economic system?
- What are the three main types of economic systems?
- What are the key features of the market economic system?
- What are the advantages of operating a market economy?
- 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
- 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
- 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.
