Markets & Economies

What is a market?  What types of economy are there?

 

Now we know what Economics is is all about, how do different countries/economies go about controlling the economy and allocating resources? You won’t be surprised that different countries have different ideologies when it comes to allocating resources.  They all have different economic systems.  There are two you need to know about:

 

Economic System A - Free Market Economy

In this kind of economy the resources that we have are all allocated by the market. If you want something, you enter the marketplace where you can interact with sellers.  In the modern day society, the buyers or consumers in the market will exchange money for a good/service that a seller is selling. Sometimes the price paid will bartered which means the buyer and seller meet face to face and agree a price.  But generally, the price which prevails in the market is called the market price or equilibrium price.  A real life example, the market price for a top of the range phone is around the £500 mark, so most sellers will be selling their phones around this price and this is what the consumer expects to pay when they enter the market.

 

This type of economy is synonymous with a capitalist economy.  A capitalist economy is an economy where production is privately owned by individuals, known as capitalists. They take a risk and they capitalise on opportunities that they see as being able to make a profit for them.  They employ labour to operate the capital that they own and make them money.  A good example of a capitalist are the dragons on Dragon’s Den.  When they see an opportunity, they are in but when they see an opportunity that is likely to fail, they are out.

 

Economic System B - Command Economy

In this type of economy there is a central planner who decides where all the resources in the economy are going to go.  To make it clear, you are told how exactly how much you are going to consume and the central planner decides how much is going to be produced also.

 

This type of economic system is synonymous with communist economies and totalitarian governments because everything is controlled. Communist economies are not very popular anymore because they generally do not work well.  It is very difficult for a central planner (the government) to plan how all resources will be used and what their respective prices will be. Shortages generally occur and as there is no profit motive there is not much innovation and technological advancement.

 

Economic System C - Mixed Economy

As the name implies, this is a mixture of the two. The UK is a mixed economy because while there are markets where buyers and sellers can intervene privately, there are also examples where the government provide a service or intervene. An example is the NHS: in a free market economy there would be no NHS because you would have to pay for the treatment you get.  In a mixed economy the NHS can exist because the government can provide it through taxpayer money.

 

This type of economy is generally the most successful in the modern day world because governments can sit back and let the markets work for themselves.  If they see a problem emerging which threatens people’s welfare, they will intervene by introducing new laws or providing the service themselves.  It’s like having your cake and eating it too.


What is economic structure?

The last thing you need to know about economies is economic structure.  It tells us what a particular economy is producing and what they are generally good at. There are 3 main categories that you need to know about:

 

Primary Sector:

The sector of the economy that is responsible for extracting the Earth’s natural resources.  For example, extraction of oil, coal, cocoa beans etc.  An example of a country that relies very much on the primary sector is Ghana. Most of the cocoa beans from your chocolate bars come from there.

 

Secondary Sector

The sector of the economy that is responsible for taking resources and manufacturing them into finished goods.  An example of a country which relies on its secondary sector is China.  They produce more than 25% of global exports.  There are so many factories there and so much machinery - they are very much a secondary sector led economy.

 

Tertiary Sector

The sector of the economy that is responsible for providing services: financial services, administration, transport and entertainment industries are all included. The UK is mainly a tertiary based economy.  We have many offices here where we provide services for clients and customers.  

 

So overall, what type of economy is the UK?

1) We have learned that it is a mixed economy because we believe in the market system but we do not ALWAYS allow the market to do EXACTLY what it wants. Sometimes, the government intervenes in the interest of the people. For example, the government places taxes on cigarettes because they are deemed bad for your health. 

2) The UK economy is also led by its tertiary sector.  We do not produce much here in terms of goods because they have to be manufactured. We leave that stuff to countries like China, India and Germany. They are good at mass manufacturing and we are not.  What we specialise in is the provision of services, which is why London is sometimes called the financial capital of the world.


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