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Market Systems

Market Systems

Definition:

 

Market: One of many varieties of systems, institutions, procedures, social relations and

infrastructures whereby parties engage in exchange. It consists of all those people

or firms who wish to exchange a given good or service.

 

Market system: Any systematic process enabling many market players to bid and helping

bidders and sellers interact and make deals. It is not just the price

mechanism but the entire system of regulation, qualification, credentials,

reputations and clearing that surrounds that mechanism and makes it

operate in a social context.

 

Price mechanism: Refers to the consumers and producers who negotiate prices of goods or

services depending on demand and supply. This is also known as  market

                                 forces.

 

 

 

Types of market systems

Market system Free economy Mixed economy Planned economy
Definition An economy in which decisions regarding investment, production and distribution are based on supply and demand and the prices of goods and services are determined in a free price system. An economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. An economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency.
Advantages ·         Capital return. Capital flows to where it will get the greatest return, expanding the total size of the economy to its maximum level.

·         Supply and Demand. Supply and demand are closely linked: Someone who has a good idea or product can quickly put it into the market so that it is available to those who want it. Conversely, when a certain type of product is desired by enough people, it is a simple matter for someone to provide it.

·         Economic freedom.  In a market economy, it is easier for someone with initiative and virtue to create a better life for themself and their family; economic freedom makes it eaiser to transform hard work and perseverance into material wealth.

 ·         Provides fair competition.  The presence of private enterprise ensures that there is fair competition in the market, and the quality of products and services are not compromised.

·         Well regulated. Market prices are well regulated. The government with its regulatory bodies ensure that the market price do not go beyond its actual price.

·         Efficient use of resources. Optimum utilization of national resources. In a mixed economy, the resources are utilized efficiently as both government and private enterprises are utilizing them.

·         It does not allow monopoly at all.  Barring a few sectors, a mixed economy does not allow any monopoly as both government and private enterprises enter every sector for business.

 ·         Stability. Long-term infrastructure investment can be made without fear of a market downturn leading to abandonment of a project.

·         Meeting collective objectives. Planned economies may be intended to serve collective rather than individual needs. The government can harness FOP to serve the economic objectives of the state.

·         Advantages over free economy. It is not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy does not suffer from business cycles, does not experience crises of overproduction. It does not result in asset bubbles – massive misallocations of resources.
Disadvantages ·         Unequal wealth distribution. a small percentage of society has the wealth while the majority lives in poverty.

·         No economic stability. greed and overproduction cause the economy to have wild swings ranging from times of robust growth to cataclysmic recessions.

·         Too competitive. A competitive environment creates an atmosphere of survival of the fittest. This causes many businesses to disregard the safety of the general public to increase the bottom line.

 

 ·         Inefficient. It’s efficiency property reduces in progressively higher degree, the more its mixed nature embraces more and more of government / state intervention and State planning and reduces the reliance on competitive market economy management mechanisms.

·         Less reliance on competition.Mixed economy system has a natural tendency to move further and further away from reliance on competitive market mechanism to greater and greater bureacratic controls and interventions.

·         Encourage state monopolies. Mixed economy systems tend to encourage more state monopolies, higher and higher tax to GDP ratio and dominant public finances, making the government a large economic player as compared to corporate or individual entities.

 ·         Inefficient resource distribution. Planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production.

·         Suppression of economic democracy and self-management.  Without economic democracy there can be troubles with the flow of knowledge as is shown with the initiative for backyard furnaces and other efforts in the Great Leap Forward.
Examples USA, Japan, Brazil Canada, Germany, UK China, Cuba, North Korea

 

The ownership of the factors of production controls:

  • What is produced
  • Where to produce
  • How to produce – the method of production (labour intensive/ capital intensive)
  • How much goods and services to produce

Economic sectors

Primary: The extraction of natural resources e.g. oil drilling, quarrying, forestry

 

Secondary: The manufacturing of goods using natural or man-made resources e.g. car assembling,

property construction, toy manufacturing

 

Tertiary: The provision of services to consumers or producers e.g. education, accounting, marketing

 

Quaternary: The provision of R&D, software development and information processing e.g. research

into fiber optics, development of search engines.