2.9 Market Economic System (Cambridge (CIE) IGCSE Economics)

A market economy is an economy with no government intervention in the allocation of resources or the distribution of goods and services.

The type of economic system is determined by how the three economic questions are answered:

• What to produce?

• How to produce?

• For whom to produce?

A planned economy is an economy where the government has complete control over economic decisions.

Two disadvantages of a market economy include any of the following:

• Workers get exploited

• Resource depletion and environmental degradation are often ignored

• This increases inequality, such that the gap between the rich and the poor continues to grow

• Wealth gets concentrated in the hands of the few as they are able to keep buying up the scarce factors of production

Freedom of choice means firms and individuals are free to make their own economic decisions.

Self-interest means entrepreneurs maximise profits, workers maximise wages, and consumers maximise satisfaction.

The price mechanism allocates scarce resources, with rising prices indicating a shortage and falling prices indicating a surplus.

True.

Theoretically, market economies have no government intervention. In reality, there is no pure market economy. More free market economies have a low level of government intervention in areas like taxation, defence, healthcare, and education.

The profit incentive motivates people to work or develop entrepreneurial ideas.

Competition often improves product quality. However, sometimes product quality falls as firms lower quality standards in order to increase profits.