This information is relevant to all A-Level exam boards.
Markets A market (or economy) is any system which attempts to solve the basic economic problem (i.e. allocate scarce resources). In markets, there are buyers and sellers.
In a free market, everyone is assumed to be rational (and so maximise utility/profit). Therefore, each transaction must result in both parties gaining utility, due to preference - e.g. one party (employee) would prefer to receive a wage, whereas the other party (employer) would prefer having more labour input.
This is the allocation of resources.
Free market economies This type of economy allocates resources according to the price mechanism, i.e. by supply and demand. This means that anything can be sold at the price it is demanded. There are no pure free market economies.
Enterprise is rewarded with high profits - encouraging innovation and risk-taking.
Increased efficiency - only high quality products will be demanded as there are no restrictions on good/service provision, therefore firms are incentivised to increase their efficiency of good production.
Increased choice - innovation incentives mean new product ranges for consumers.
High income inequality - no benefit system to redistribute income; no income for those unable to work.
Lack of public good provision - these are non-profitable, so would not be provided (see Market Failure).
Monopoly power - successful businesses may abuse their market dominance to shut down smaller firms.
Command economies In these communist economies, governments decide how resources should be allocated. An example would be the former USSR. The downfall of communism came in the late 1900s, making these economies rarer, however countries such as North Korea still operate these economies.
Low unemployment - govt. can provide everyone with jobs.
Welfare maximisation - govt's can redistribute income; provide benefits; ensure production is in society's best interests.
Prevention of monopolies - through regulation.
Limited choice - firms are less free to produce; they produce what is allowed under regulation.
Lack of entrepreneurship - firms ran by the govt are unlikely to take risks, innovate or increase efficiency due to the lack of profit incentive.
Reduction in allocative efficiency - govt's occasionally lack information to make informed decisions on resource allocation.
Mixed economies Most countries fit under this bracket - they are a 'mix' between the free market and government allocating resources in an economy.
These economies have a private and publicsector.
The government operate the public sector.
Private businesses make up the private sector.
Private businesses must make profit or at least break-even to maintain themselves.
The role of the government in a mixed economy Market failure occurs when the free market causes undesirable results. Governments tend to intervene to correct these failures. They can change laws, offer tax breaks or influence consumer behaviour in other ways. They also intervene by providing certain goods/services - such as public goods and occasionally merit goods.
A public good is a commodity or service that is provided without profit to all members of a society, either by the government or by a private individual or organisation. They would not be provided by the market due to the free rider problem. E.g. defence, street lighting.
A merit good is a commodity or service that is regarded by society or government as deserving public finance. They create positive externalities. E.g. health, education.
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