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IGCSEEconomicsCambridge (CIE)Revision Notes2. The Allocation of Resources2.8 Market Economic SystemUnderstanding the Market Economic System

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First teaching 2025

First exams 2027

Understanding the Market Economic System (Cambridge (CIE) IGCSE Economics): Revision Note

Exam code: 0455 & 0987

Steve Vorster

Written by: Steve Vorster

Reviewed by: Lisa Eades

Updated on

What is a market economic 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 

Economic spectrum with planned to market economies; examples are China, Norway, Germany, Australia, UK, USA, Singapore under respective categories.
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

  • 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

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    Author
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    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Lisa Eades

    Reviewer: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.