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Admin November 14, 2015 Igcse Economics Revision Notes, O Level Economics Revision Notes 3
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Economic Systems:
How an economy decides, how to allocate its resources is its economic system. There are three
kinds of economic systems:
Characteristics:
Private Property:
Individuals have the right to own, control and dispose of land, buildings, machinery and other man-
made and natural resources.
Owners are also provided with the right to income from property owned in the form of rent, wages,
interest and profits.
Workers are free to enter and leave any occupation for which they are qualified.
Consumers are free to choose the goods and services they want to buy.
Price Mechanism:
It is one of the most important features in the free market economy.
Through the price mechanism, the consumers can inform producers about the goods they want to
buy. Producers who are motivated by large profits will produce the goods that the
consumer wants.
The price mechanism works in the following way if the good becomes popular among consumers,
the demand for it would start to rise, which would lead to an increase in the price.
This increase in the price would motivate the producers to make more of the good.
However, if the consumers do not want a particular good, then its price would fall informing the
producers not to make that good thus prices act as a signal telling producers to make or not to make
a good.
Self Interest
Firms will try to maximize profits
Workers will tend to move to those occupations and locations which offer the highest wages.
Consumers will spend their incomes on those goods which yield the maximum satisfaction.
Competition:
Producers compete against one another for consumer spending.
Firms also try to compete with each other by providing the highest quality to consumers.
Efficiency:
Firms that produce goods using the cheapest method of production are said to be efficient. Firms in
the free market economy try to be efficient in order to make high profits.
New methods of production and better machinery can help firms to reduce costs.
Automatic operation:
The price mechanism helps to reduce the need for making decisions through the large administrative
bureaucracy as prices act as a signal telling producers get to know whether they should make more
or less of a good.
Time is not wasted on planning and deciding which good should be produced and also the cost of
employing planners is avoided.
Disadvantages Of The Market System:
Unequal distribution of the income and wealth:
Those who can own factors of production such as land and capital will be richer than those who
dont as they will have greater spending power. Thus, there will be an unequal distribution of income
and wealth between people who have the money and people who dont.
There are some goods that are not profitable as it is difficult to charge a price for it and restrict
consumers from enjoying the benefits of these products without paying for them. E.g. street lightning
defense, vaccination
Since firms are motivated by profits, they can produce harmful goods for which people are willing to
pay a high price such as cigarettes and drugs.
Monopolies :
Since there is less or no government intervention in the market economy there is no restriction to
stop firms from growing into monopolies.
Characteristics:
Public ownership Government owns the factors of production.
No freedom of choice
Social interest
Government decides
What to produce?
How to produce?
For whom to produce?
Through the help of planners
Employment :
Everyone works for the government.
Inefficiency:
Planners are not only costly, but they also decide which production method to choose.
This production method may not be the cheapest as profits play no part in the allocation of
resources.
Some firms are privately owned and some are owned by the government.
Some prices are determined by the market forces of demand and supply (price mechanism) and
some are set by the government.
Both consumers and the government influence what is produced.
Since mixed economy combines the characteristics of both command and market economy. It also
combines the advantages of the two systems.