Lecture notes
General economics
- Institution
- Lancaster University (LU)
The document deals economics.It comprehensively decribes market systems as in economics
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Chapter 2Market Systems
What are market systems?
These are mechanisms of allocating resources in the economy. Resources may be allocated by
government when it makes decisions to anwer the central economic problem. On the other hand
the questions may be ansered through the free interaction of demand and supply in the economy.
State and explain the three main market systems.
1. The free market or price or capitalist System
The free market system is where the decision about what is produced is the outcome of millions
of separate individual decisions made by consumers, producers and owners of productive
services. The decisions reflect private preferences and interests. For the free enterprise to operate
there must be a price system/mechanism. The price system is the situation where the vital
economic decisions in the economy are reached through the workings of the market price. There
is no government intervention, Thus, everything – houses, labour, food, land etc come to have its
market price, and it is through the workings of the market prices that the "What?", "How?", and
"For whom?" decisions are taken. The free market thus gives rise to what is called Consumer
Sovereignty – a situation in which consumers are the ultimate dictators, subject to the level of
technology, of the kind and quantity of commodities to be produced. Consumers are said to
exercise this power by bidding up the prices of the goods they want most; and suppliers,
following the lure of higher prices and profits, produce more of the goods.
What are The features of a free market system?
(i) Ownership of Means of Production
Individuals are free to own the means of production i.e. land, capital and enjoy incomes from
them in the form of rent, interest and profits.
(ii) Freedom of Choice and Enterprise
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, Entrepreneurs are free to invest in businesses of their choice, produce any product of their
choice, workers are free to sell their labour in occupations and industries of their choice;
Consumers are free to consume products of their choice.
(iii) Self Interest as the Dominating Motive
Firms aim at maximising their profits, workers aim at maximising their wages, landowners aim
at maximising their return from their land, and consumers at maximising their satisfaction
(iv) Competition
Economic rivalry or competition envisages a situation where, in the market for each commodity,
there are a large number of buyers and sellers. It is the forces of total demand and total supply
which determine the market price, and each participant, whether buyer or seller, must take this
price as given since it's beyond his or her influence or control.
(v) Reliance on the Price Mechanism
Price mechanism is where the prices are determined on the market by supply and demand, and
consumers base their expenditure plans and producers their production plans on market prices.
Price mechanism rations the scarce goods and services in that, those who can afford the price
will buy and those who cannot afford the price will not pay.
(vi) Limited Role of Government
In these systems, apart from playing its traditional role of providing defence, police service and
such infrastructural facilities as roads for public transport, the Government plays a very limited
role in directly economic profit making activities.
Describe how Resources are allocated in a free market
There are no central committees organising the allocation of resources
The major price and allocation decisions are made in the markets. The market being the process
by which the buyers and sellers of a good interact to determine its price and quantity.
If more is wanted of any commodity say wheat – a flood of new orders will be placed for it. As
the buyers scramble around to buy more wheat, the sellers will raise the price of wheat to ration
out a limited supply. And the higher price will cause more wheat to be produced. The reverse
will also be true.
People, by being willing to spend money, signal to producers what it is they wish to be produced.
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