Unit 2.9 Market Economic System

S2
IGCSE®/O Level Economics
2.9 Market Economic systems

2.10 Market Failure
2.11 Mixed Economic System
© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
Definition : market economic system
In a market economic
system, all firms aim to
make a profit and they do
this by mowing scarce
resources away from
producing things people
will not buy into the
production of
goods/services
that they will buy.
Economic systems
Who in an economy decides what goods and services to
produce, how to produce them and who to produce them
for, and how are these decisions are made?
Market economy Mixed economy Planned economy

Who? Who? Who?
Private sector firms and Private sector firms and Government
consumers consumers, and a
government
How? How?
How?
The price mechanism The price mechanism and
Government planning
government planning
Economic systems
Bahamas Argentina Denmark France China North Korea

Italy Sweden Cuba
Singapore Mauritius UK
Nepal Many developed economies
Paraguay
The market economic system
Consumers Private sector producers
Goods and services
Money
Consumption Exchange Production
In a free market economic system all decisions are taken by private

sector organizations and individuals. There is little or no role for government
or a public sector and therefore little or no taxation or public spending.
The price mechanism
A market is any set of arrangements that brings together all the producers
and consumers of a good or service so that they can engage in
exchange.
Market price and quantity traded
Consumers consume goods and Private firms produce goods and

services to maximize their utility services to maximize their
(satisfaction) profits
As consumer demand for a product rises MARKET PRICE RISES Production becomes more profitable, so
producers increase output
As consumer demand for a product falls MARKET PRICE FALLS Production becomes less profitable,
so producers reduce
output
What’s good about the market system?
• A wide variety of goods and If consumer demand is rising,

prices will rise and
services will be produced to satisfy production becomes more
consumer wants profitable.
Entrepreneurs will allocate resources
• Firms respond quickly to changes to their most profitable uses
in consumer wants and spending
patterns
Profits can be increased by
• The profit motive of firms encourages increasing sales and/or
reducing costs of production
them to develop new products and
use the most efficient methods of
production There is no public sector in a
totally free market economic system
• There are no taxes
How the market system can fail
Market failure: when free markets fail to produce goods and services that are
worthwhile or when the decisions of producers or consumers result in wasteful or
harmful activities
Firms will only produce Firms will only supply Resources will only be
goods and services if they products to consumers employed if it is profitable
are profitable who are able to pay for to do so
them
How the market system can fail
Market failure: when free markets fail to produce goods and services that are
worthwhile or when the decisions of producers or consumers result in wasteful or
harmful activities
Harmful goods may be Some producers and Some firms may restrict
produced if it is profitable consumers may ignore competition, mislead
to do so the harmful effects of consumers and charge
their activities on others them very high prices
and the environment (monopoly)
The mixed economic system
In a mixed economy a government can intervene in different markets in
an attempt to correct the worst market failures:
✔ It can provide useful and essential goods and services
✔ It can provide goods and services for people in the greatest need
✔ It can employ people in public sector organizations and provide
financial support (subsidies) to private sector firms to boost output and
employment
✔ It can outlaw the production of harmful goods and dangerous activities
✔ It can outlaw business practices that restrict competition or mislead
consumers
The mixed economic system
A mixed economy therefore combines the advantages of a market economic
system with:
• government ownership and control of • government interventions to regulate the

some scarce resources actions of private sector firms and
consumers in some markets
Government intervention: some problems
By correcting failures in some markets, a government may distort

the allocation of resources and cause problems in others:
X High taxes on people and firms can distort market price signals and reduce
work incentives
X Land regulations can increase production costs and therefore reduce the
profitability and supply of some goods and services
X Public sector organizations may be inefficient and produce poor-quality
goods and services because they do not have to make a profit
X Some government spending may be for political or even personal gain

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S2

IGCSE®/O Level Economics

2.9 Market Economic systems

Market economy Mixed economy Planned economy

Bahamas Argentina Denmark France China North Korea

Consumers Private sector producers

Goods and services

Consumption Exchange Production

In a free market economic system all decisions are taken by private

Market price and quantity traded

Consumers consume goods and Private firms produce goods and

• A wide variety of goods and If consumer demand is rising,

• government ownership and control of • government interventions to regulate the

By correcting failures in some markets, a government may distort

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