2.9 Market Economic System (Cambridge (CIE) IGCSE Economics)

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  • What is a market economy?

    A market economy is an economy with no government intervention in the allocation of resources or the distribution of goods and services.

  • What determines the type of economic system?

    The type of economic system is determined by how the three economic questions are answered:

    • What to produce?

    • How to produce?

    • For whom to produce?

  • State the meaning of a planned economy.

    A planned economy is an economy where the government has complete control over economic decisions.

  • State two disadvantages of a market economy.

    Two disadvantages of a market economy include any of the following:

    • Workers get exploited

    • Resource depletion and environmental degradation are often ignored

    • This increases inequality, such that the gap between the rich and the poor continues to grow

    • Wealth gets concentrated in the hands of the few as they are able to keep buying up the scarce factors of production

  • Define the phrase freedom of choice in a market system.

    Freedom of choice means firms and individuals are free to make their own economic decisions.

  • What does self-interest mean in a market system?

    Self-interest means entrepreneurs maximise profits, workers maximise wages, and consumers maximise satisfaction.

  • State the role of the price mechanism.

    The price mechanism allocates scarce resources, with rising prices indicating a shortage and falling prices indicating a surplus.

  • True or False?

    Market economies have no government intervention.

    True.

    Theoretically, market economies have no government intervention. In reality, there is no pure market economy. More free market economies have a low level of government intervention in areas like taxation, defence, healthcare, and education.

  • What is the advantage of the profit incentive?

    The profit incentive motivates people to work or develop entrepreneurial ideas.

  • How does competition impact product quality?

    Competition often improves product quality. However, sometimes product quality falls as firms lower quality standards in order to increase profits.