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