The market economic system Cambridge IGCSE Economics (9–1) revision
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In plain words
In a market economy nobody is in charge of deciding what gets made. Firms make what they can sell at a profit, and consumers buy what they want and can afford. Prices do the organising.
Resources are owned by private individuals and firms, and the government plays very little part.
4 things to know
- In a market economic system resources are allocated by the price mechanism, through demand and supply, and are privately owned.
- What to produce: whatever consumers are willing to pay for. How: at the lowest cost, to make the most profit. For whom: those able to pay.
- Advantages: wide choice, firms have an incentive to be efficient and to innovate, and resources move quickly to what consumers want.
- Disadvantages: public goods are not provided, merit goods are under-provided, harmful goods are over-produced, incomes can be very unequal, and firms can grow into monopolies.
Tips and tricks
- In a market economy "for whom" is answered by income, not by need. That is the root of the inequality argument against it.
- Learn at least two advantages and two disadvantages, each with a reason. "Discuss" questions want both sides.
It lands in your notebook with its questions as flashcards.
The market economic system: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
In a market economic system, what mainly decides what is produced?
Firms produce what consumers are willing to pay for.
Who owns most resources in a market economy?
Private ownership is a defining feature.
Which is an advantage of a market economic system?
Competition and profit push firms to keep costs down.
Which good would a pure market economy fail to provide?
Street lighting is a public good: firms cannot charge the people who benefit.
In a market economy, how is the question "for whom to produce" answered?
Ability to pay decides who gets what.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
The market economic system
Cambridge IGCSE Economics (9–1) 0987 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define a market economic system.[2]
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An economy in which resources are privately owned and allocated by the price mechanism, through demand and supply, with little government involvement.
Explain how the profit motive can benefit consumers in a market economy.[3]
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Firms compete to earn profit, so they try to cut costs, which can lower prices, and to improve quality and bring out new products to win customers.
Explain one disadvantage of a market economic system.[3]
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Goods are produced only for those who can pay, so people on low incomes may be unable to afford essentials such as healthcare, and inequality can be high.
Answers: The market economic system
- 1. An economy in which resources are privately owned and allocated by the price mechanism, through demand and supply, with little government involvement.
- 2. Firms compete to earn profit, so they try to cut costs, which can lower prices, and to improve quality and bring out new products to win customers.
- 3. Goods are produced only for those who can pay, so people on low incomes may be unable to afford essentials such as healthcare, and inequality can be high.