Understanding the Market Economic System (Cambridge International IGCSE Economics)
Exam board Cambridge International · IGCSEUpdated 2025-08-04
What is a market economic system?
Spec point — The market system
-
A market economy is an economy that has no government intervention in the allocation of resources and distribution of goods or services
- This is also called a free market economy
- There is no purely free market economy in the world but some countries have less government intervention than others
-
An economy can be considered to be a market, mixed or planned economy
- The type of economy is determined by how the three economic questions are answered (for more on this, read 1.1 Resource Allocation Decisions)
- This ultimately determines the amount of government intervention in an economy
The spectrum of economic systems and where certain economies fall based on the degree of government intervention
- North Korea is a planned economy
- The United States, Japan and Singapore are mixed economies but have less government intervention than Norway, Germany or China
Characteristics of a market system
| Characteristic | Explanation |
|---|---|
| Property ownership | - Individuals have the right to purchase the factors of production |
| Freedom of choice | - Individuals are free to start their own business - Firms are free to decide what they are going to produce, how, and for whom - Workers are free to decide who they are going to work for - Consumers decided what goods/services best meet their wants/needs |
| Self-interest is maximised | - Entrepreneurs maximise profits - Workers maximise wages - Consumers maximise their well-being/satisfaction |
| Limited government intervention | - A pure market economy has no government intervention - Most free market economies have a low level of intervention, usually in the form of taxation, provision of defence, healthcare and education |
| Price mechanism allocates resources | - Changes in prices allocate scarce resources - Rising prices indicate a shortage of resources and falling prices indicate a surplus of resources |
Advantages and disadvantages of a market economic system
Spec point — "• advantages of the market economic system • disadvantages of the market economic system"
Advantages and disadvantages of a market economic system
- In a market economy, decisions about what to produce, how to produce it, and for whom are made by individuals and private firms, based on supply, demand, and price signals — not by the government
- This system encourages competition, efficiency and innovation, but it can also lead to inequality and market failures
Evaluating market economies
| Advantages | Disadvantages |
|---|---|
| - The profit incentive motivates people to work or develop entrepreneurial ideas - Greater variety of goods/services - Competition leads to better quality of goods/services - Competition leads to lower prices of goods/services - Competition encourages innovation and product development - Profits, income and wealth are unlimited resulting in better standards of living for some - More efficient use of scarce resources | - Wealth gets concentrated in the hands of the few, as they are able to keep buying up the scarce factors of production - This increases inequality such that the gap between the rich and the poor continues to grow - Sometimes product quality falls as firms lower quality standards in order to increase profits - Workers get exploited - Resource depletion and environmental degradation are often ignored - Monopolies develop as firms increase market power through mergers and acquisitions - This leads to exploitation of consumers and supply chains |
Was this revision note helpful?
Build on this topic