Advantages and Disadvantages of different market systems
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Published: Thu, 18 May 2017
The Market System can be defined as any systemic method enabling many markets to bid and ask, helping buyers and sellers interact and make deals. It is an economic system that relies upon markets to allocate resources and determine prices.
Markets alone are used to allocate scarce resources of land, labour and capital. In solving the problem of scarcity three questions are always asked, what to produce, how to produce it and for whom to produce. Scarcity occurs because consumers have an unlimited want and the resources available cannot satisfy these wants as the resources are limited.
The main economic systems are the free economy, the command economy and the mixed economy. In the command the state controls all of the resources while in the mixed economy the resources are owned by both the state and the private sector.
In the free economy market all resources are privately owned. The government has no say in what is produced. In this market there is consumer sovereignty, which means that consumers demand acts as a signal to suppliers indicating what should be produce. Consumer decisions about what to buy and more important about what not to buy are essentially important to the market system. The market system is based on the supply and demand of products. The necessary mechanism for the administration of an idealized free market includes the complete absence of artificial price pressures from government taxes, subsidies, tariffs or regulation.
There are some advantages associated with the free market. A free market economy allows competition. Without competition, prices would be a lot higher. Competition allows goods to be produced at a high quality and sold at affordable prices. Companies compete for more customers and a sure way of gaining customers is to lower the price of goods and services. Consumers have a choice as to what company they should purchase from.
In order to operate effectively and efficiently the market system is dependent on a number of factors:-
The profit motive is an incentive for a reward for being in business
Both producers and consumers have access to the same information
Reflected in the price is the benefits and cost of production and consumption
Resources move effortlessness to different users
At the core of the market system is the motivation to earn profit. Entrepreneurs who organize resources into production are enthused to take risks. They produce goods and services with the hope of gaining returns on their labours. Maximising revenue and reducing cast to a minimum creates supernormal profit.
In order to maximise revenue and reduce costs, firms rely on information that is of a high quality. This enable them to access supplies and find resources at minimum cost and establish ways of manage production in the most resourceful way. Equally, consumers obtain guidance about what they are getting for their money and also what is available based on the information that is available to them.
The market would achieve equilibrium without any government intervention. There will also be increase employment.
There are some disadvantages also associated with a market system.
Unsupervised management could result in a loss of profit.
Demerit goods and serviced will be available to the consumers.
Prices could increase thus causing demand to fall.
In such a market a positive investment climate is more or less dependent upon the individual as Government interference in the economy is kept to an absolute minimum. A favourable investment climate gives confidence to businesses to increase productivity and improve efficiency in order to increase revenues earned and capital available for investment. It also provides investors with market confidence and persuades them to invest more capital.
Based on the state of the economy, firms evaluate investment opportunities and relate them to government policies to ascertain what is the general economic conditions affecting the financial markets. A good investment climate will reflect a low crime rate, a skilled labour force and low corporate taxes. Confidence in businesses will encourage investment. If confidence among business falls firms may be reluctant to invest. This will be an indication if the economy will grow or shrink. It will cause uncertainty in the economy.
The main aspect is not what firms are saying but what firms are doing and experiencing. The business mood can change positively or negatively by various developments in the economy. When it is negative or on a down slope, or in other words when the market fails this is when the government needs to intervene and promote strength and trustworthiness of the economy which are critical elements of a sound investment climate.
Word Count: 773 Word
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