IB Economics Paper 1 - Features of Market Economy

Essay by steph_veve May 2009

download word file, 6 pages 0.0

Downloaded 39 times

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"...