Economic Systems and the Role of the Market

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    Economic Systems and the Role of the Market

    • The choices that are made in an economy are determined by the economic system of a particular country
      • The three main types of economic system are the market economy, the mixed economy, and the command economy
        • The former soviet states switched from a command economy to a mixed economy as the market now has an increasing role to play

    The Market Economy

    • In a market economy, resources are allocated through the forces of supply and demand; through the price mechanism.
    • Decisions are made by companies and firms with respect to how resources are allocated – not the government
    • Households and firms interact as buyers and sellers
    • Price and the free operation of the price system are central to the way that resources are allocated
    • The market operates with little interference
    • Prices and self interest of people and businesses therefore act as a kind-of ‘barometer’ to the decisions that have to be made

     

     

    • Similar to the Market economy, it only really exists in theory
    • The government has a central role in all decisions that are made
    • Decision making is by planning boards, and production is controlled by the state
    • What is available to consumers is determined through centralization

     

    • The government and its organisations are responsible for the allocation of resources
    • Production budgets are set for the main sectors of the economy such as agriculture and manufacturing
    • These targets are linked to planning from long term growth through an increase in productive potential
    • Prices of essential items and the determination of wages are controlled
    • The state controls most productive resources
    • The market doesn’t have much of a role with the allocation of resources

     

    • In practise, government intervention is needed in any economy
    • They find it necessary to control the workings of the market mechanism, usually due to political reasons.
      • g., the government usually needs to subsidise basic foodstuffs such as bread and meat to keep prices low and fixed, so members of the public can buy them.
    • A consequence of artificially low prices is excess demand relative to supply
    • Private ownership of productive resources is often restricted to things like small shops, restaurants and hair dressers.
    • The aim is to achieve a high rate of growth

    The Mixed Economy

    • This is the most common economic system
    • Both the private and public sector have a part in the allocation of resources
    • Decisions involve interactions between firms, labour and the government, mainly through the market mechanism
    • There is private ownership of most resources, although public ownership does exist to varying degrees
    • The latest ‘trend’ in the last 20 years has been one of privatisation
      • This is moving resources from the public to the private sector
    • This has been the trend in many economies, including the UK and the EU
    • The introduction of an increased emphasis on market forces has had problems
      • Jobs in manufacturing plants in the UK have closed down due to cheaper locations like south east Asia and eastern Europe offering cheaper labour

     

    • Former states of the USSR have been changed from a near-command economy to a mixed economy.
      • This has resulted in a huge flow of foreign investment, especially in manufacturing and retail sectors
    • Private companies are being started in such economies, and former state owned companies have been sold off to private owners, who have adopted it and made big profits

     

    • In Asian ‘Tiger’ economies, some states such as Singapore have had a strong focus on letting the market allocate resources.
    • Free enterprise is encourage, and the rewards can be high
    • Others, such as Malaysia, have placed more emphasis on central planning
    • China’s phenomenal growth has been based on controlled management of the economy, but with clear opportunities for foreign investors and domestic companies to influence the allocation of resources.

     

     

     

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