Economic Systems and the Role of the Market

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.