Preview

IB Economics Paper 1 - Features of Market Economy

Good Essays
Open Document
Open Document
1423 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
IB Economics Paper 1 - Features of Market Economy
1 (A)Explain the main characteristics of a market economy, also called the "free market economy" and "free enterprise economy" is an economic system based on the distribution of economic goods where private individuals own the factors of production (land, capital, labor and enterprise) and decide what to produce. Prices of goods and services are determined in a free price system guided by the function of demand and supply. For example, the price of thick jackets will drop in summer because there is more demand of it in the winter. A market economy often contrasts with another economic system called the "planned economy", where there is a central government controlling the factors of production, what to produce, and goods using a fixed price system. The main characteristics of a market economy includes the pure market and the mixed market economy, private ownership of the means of production, the profit motive, self interest, competition between firms, signaling and rationing function of prices, and the private and public sectors.

In the real world, the ideology of a pure market economy and a pure planned economy does not exist, because all the countries have a government to control and regulate its own economy. According to the Index of Economic Index by Heritage Foundation, Hong Kong is considered the freest economy in 2008 - 90.3% free from government interventions. Therefore, most of the countries in the world are a mixed economy leaning towards the free market, with the exception of North Korea and Cuba who leans towards socialism and the planned economy. Other examples of the free market economy include UK, US, France, Russia, and China etc.

A main characteristic of the market economy has no central planning guiding the system; However, Adam smith says that there is an "invisible hand" that guides it, signaling and rationalizing the market. To determine where and how the resources should be located, we can tell through the prices paid for the particular



Bibliography: McGuigan, Brendan. What is a Market Economy. WiseGeek. 3 May 2009 . Free Market Economy. Economy Watch. 3 May 2009 .

You May Also Find These Documents Helpful

  • Satisfactory Essays

    The emergence of this kind of economy is mainly due to weaknesses in the market…

    • 520 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    business q@a

    • 728 Words
    • 3 Pages

    A free market is a market economy in which the forces of supply and demand are not controlled by a government. A free market contrasts with a controlled market, where government intervenes in supply and demand through non-market methods such as laws controlling who is allowed to enter the…

    • 728 Words
    • 3 Pages
    Good Essays
  • Good Essays

    A market economy is an economic system controlled, regulated, and directed by markets alone; order in the production and distribution of goods is entrusted to this self-regulating mechanism. An economy of this kind derives from the expectation that human beings behave in such a way as to achieve maximum money gains. It assumes markets in which the supply of goods (including services) available at a definite price will equal the demand at that price. It assumes the presence of money, which functions as purchasing power in the hands of its owners. Production will then be controlled by prices, for the profits of those who direct production will depend upon them; the distribution of the goods also will depend upon prices, for prices form incomes, and it is with the help of these incomes that the goods produced are distributed amongst the members of society. Under these assumptions order in the production and distribution of goods is…

    • 3782 Words
    • 16 Pages
    Good Essays
  • Good Essays

    Market Economy is the government does not affect any decisions that individual businesses make. The decisions of allocating limited resources are made by private businesses and people. Profit is the motive of producing and running the business.Government only makes the basic laws such as laws that ensure humanity and fairness. Price is determined by market demand and supply.…

    • 631 Words
    • 3 Pages
    Good Essays
  • Good Essays

    900 Words

    • 892 Words
    • 3 Pages

    The U.S. economy is essentially a free market economy which is an economic market that is run by supply and demand with certain government regulation. In an actual free market economy, buyers and sellers operate their own business without any government policies however there is an argument among politicians and economists on the actual policies. For example, based on a mutual agreement on price without state intervention in the form of regulation, subsidies, and taxes. In financial markets, free markets stocks are securities that are traded and prices are not affected by availability. Also, in foreign-exchange markets, it is a market where exchange rates are not controlled by the government and thus rise and drop freely though supply and demand for currently. Historically, no nation actually had an authentic form of a free-market economy. With that being said, it is purely a theoretical concept. However, given contemporary usage by economists such as Canada, Hong Kong, Singapore, Australia, New Zealand and Switzerland are considered to be among the “Free economies” as of 2014. Lastly, when a free money economy spins out of control, the disadvantages can be extremely severe. For example, the Great Depression of the 1930’s to the real estate market crash of 2008, market failures has negatively affected the lives of millions of Americans in homelessness, unemployment, and lost income.…

    • 892 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Invisible Hand

    • 1802 Words
    • 8 Pages

    Adam Smith (1723-1790) was one of the greatest economists in the world with his concept of the “Invisible Hand”. The “Invisible Hand” explains the reasons why people do things in the market based on the principles of supply and demand. This theory also creates an economic system called free market or liberal market. This type of market has some main features namely, no governmental interventions and high competition. Adam Smith’s theory is interesting because he was the first one to set up the idea of a “market” that still exists now. The aim of this essay is to give an overview of the “Invisible hand”, analyze advantages and disadvantages of Smith’s theory. Furthermore, may give some comments on his theory, its application in Vietnam context and make some possible recommendations for the current situation.…

    • 1802 Words
    • 8 Pages
    Powerful Essays
  • Satisfactory Essays

    Command vs Market Economy

    • 481 Words
    • 2 Pages

    As opposed to Command Economic System, Market Economic System is characterized by near to minimal role of Government in governing and directing economic activity of the country. In other words, it is simply the opposite of a command economic system discussed above. The salient features of a market economic system includes “Private” ownership of economic resources (i.e., land, labor, capital and…

    • 481 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Fdgfj

    • 830 Words
    • 4 Pages

    In recent years, market economies have been coming more and more popular. Three major examples of market economies are The United States, Japan, and France. One major advantage is that market economies can adjust to change easily. If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government protocol first. Rational self interests in market economies are also encouraged. People have the ability to make as much money as they can and do what is in their best interest. Another positive to market economies is that the government tries to stay out of the way of businesses. Although the government sets certain standards businesses must follow, for the most part businesses can do as they please, allowing them to produce what they want, how they want. A fourth advantage to the market economy is that there is a great variety of goods and services for consumers. If there is a demand for a good or service, the demand will almost always be met in a market economy. Although there are a lot of positives to market economies, there are also many negatives that go along with it too.…

    • 830 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    An economic system that has both the free market system and the government involvement in the economy…

    • 381 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Free Market Economy

    • 416 Words
    • 2 Pages

    The term free market economy primarily means a system where the buyers and sellers are solely responsible for the choices they make. In a way, free market gives the absolute power to prices to determine the allocation and distribution of goods and services. These prices, in turn, are fixed by the forces of supply and demand of a respective commodity. In cases of demand falling short of the supply of a respective commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or service. Free market economy is also characterized by free trade without any tariffs or subsidies imposed by the government.…

    • 416 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Demand & Supply

    • 2185 Words
    • 9 Pages

    In the market economy, the interaction of the buyers and sellers determines how the market will work. Buyers demand and producers sell for a particular quantity of goods and services at a certain level of prices. To Adam Smith, widely cited as the father of Modern Economics and Capitalism, in a free market, consumers are free to choose varieties of commodities, while producers have freedom of choice the commodities for sale and its production. Market settles on the price that maximizes the benefit of the consumers and producers, resulting in “Happiness of Mankind”.…

    • 2185 Words
    • 9 Pages
    Better Essays
  • Better Essays

    economics essay

    • 1974 Words
    • 8 Pages

    It can be argued that most countries adopt some form of mixed economy, disregarding a free market economy which forms automatically. A mixed economy is where…

    • 1974 Words
    • 8 Pages
    Better Essays
  • Good Essays

    TYPES OF ECONOMIC SYSTEMS

    • 3255 Words
    • 9 Pages

    Market economies are based on consumers and their buying decisions rather than under government control. Market trends and product popularity generate what businesses produce. The producers choose how to make products based on the most economically sound decision: that might mean machine labor to save costs or human labor for specific skills. The buyers decide who gets which products by what they are willing to pay for what they want.…

    • 3255 Words
    • 9 Pages
    Good Essays
  • Good Essays

    Neither a planned economy nor that of free market is perfect. A free market economy is more successful at motivating competition to occur. Since it is basically every man for himself, every man does in fact work to create a good quality of life. One big advantage is that resources are distributed in a better way using prices, allowing the economy to work more efficiently. However, surpluses and shortages can occur when the demand of one product changes to another. This means that the price of the product in surplus must go down so it is more widely available. Thus, the price of the product in shortage will go up until the other product is bought. Then the production can be switched to that of the product higher in demand. Because this economy is driven by the profit motive, a purely free market economy can be a terrible thing. The big companies will become corrupt and prey on other industries leading to an extreme amount of pollution, high prices, and excessive control. To fix this, like in the United States, government involvement has been integrated into…

    • 630 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Free Market

    • 3501 Words
    • 15 Pages

    Before we look at how the three questions are answered, we must quickly look at some of the characteristics of a free market economy.…

    • 3501 Words
    • 15 Pages
    Powerful Essays