Economic Systems

This section will explain the different types of market system and identify the key features of each economic system.

"Free Market" System

  • All resources are owned & controlled by private individuals
  • There is NO Government & Taxes
  • Consumers decide on what should be produced by what they buy
  • Resources are distributed through the price mechanism
  • All firms aim to maximise their profits

There are no examples of free market economies in the World

Advantages

  • Consumers are free to choose what they want to buy.
  • Workers are encouraged to work hard as they can keep most or all of their incomes because of low or non-existent taxes.
  • Businesses compete with each other and this could keep prices low.
  • New businesses are encouraged to set up in order to make profits – profit maximisation

Disadvantages

  • No services, such as health and education services, available to everybody, only bought by those who can afford it!
  • No government planning = many uncontrolled booms or recessions in the economy.
  • Businesses might be encouraged to create monopolies in order to increase prices. Consumers would have limited choice.
  • Everyone operates with their own self interest

Mixed Economy

  • A mixture of free enterprise and state controlled
  • Some resources owned by the State and some by private individuals
  • Businesses make decisions & the Government try to influence and control some areas such as Taxes & Laws.

Advantages

  • Government control should eliminate any waste resulting from competition between firms.
  • There should be work for everybody.
  • The needs of the population are met, but there is little production of luxury goods for the wealthy.

Disadvantages

  • There is less incentive to work as the government fixes wages and private property is not allowed.
  • The government may not produce goods which people want to buy.
  • The lack of a profit motive for firms leads to low efficiency.

Planned Economy

  • Everything is decided by the Government
  • Resources are owned by the State
  • The Government controls all businesses

Very few examples in the World today

Advantages

  • Government decides what should be produced, how much and for whom
  • Decreases inequalities

Disadvantages

  • Lack of choice for customers
  • Little incentive for competition between producers
  • Centralised control and bureaucracy

Primary, Secondary and Tertiary production

Primary sector – extracting resources from the land e.g. agriculture, fishing

Secondary sector – processing resources e.g. manufacturing. If you are looking to enter the secondary sector you will need:

  • To have good supplies of raw materials
  • A suitable site and facilities to manufacture the goods
  • Relatively cheap labour

Tertiary sector – the provision of services e.g. universities, retail sector.If you are entering the tertiary sector you will need:

  • Good suppliers of manufactured products
  • To provide an exceptional level of service

 

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