Download SECTION A: THE MARKET SYSTEM

SECTION A: THE MARKET SYSTEM
Part 2 The role of the market in solving the
economic problem
Chapter 12: The mixed economy
Edexcel International GCSE Economics
Getting Started…
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Public and Private sectors
Private sector – individuals, groups of
individuals – set up businesses and sell
goods and services.
Public sector – government departments,
kantons, councils, states, etc.
– Usually free and paid for by...?
– Taxes
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Question 1 – UK govt. expenditure – pg 47
a) The pie chart shows that social protection is the largest
item of expenditure for the UK government. At £161 billion it
represents more than a quarter of all government spending.
(b) The provision of hospital services is the responsibility of
the National Health Service (NHS). This is organised by the
Department of Health, so health spending would have to be
increased if new hospitals were to be built.
(c) Most government expenditure is funded from taxation,
direct charges for services or borrowing. Obviously if the
government borrows money it must pay interest. Therefore
the £30 billion debt interest is the interest paid by the
government on the amount it has borrowed.
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Types of economy
Who is this?
Kim Jong Un,
Leader of North Korea
Or the Democratic People’s
Republic of Korea
How is the North Korean
economy managed?
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Command or Planned economy
Public sector chooses, produces and
distributes goods.
All planning, organising, production done
by the state.
Goods sold by the state at prices set by the
state.
Examples – North Korea, Cuba, Former
Soviet Union, China (not now)
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market/Free enterprise economy
Majority of goods and services provided by private
sector.
Allocation of resources determined by market
forces.
Public sector provides legal system, monetary
system, defence, police.
Examples – No perfect examples, most free market
economies are...Hong Kong, Singapore, New
Zealand, Australia and...?
Switzerland.
http://www.heritage.org/index/ranking
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market/Free enterprise economy
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Mixed economy
Guess what these are...
Economies that rely on both the private
and public sector.
Virtually every country in the world is a
mixed economy.
The difference is which decisions are made
by the public sector and which are made by
the private sector.
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Mixed economy
What to produce...?
• Consumer goods are
best provided by the
private sector – the
market system ensures
businesses produce
what the consumers
want.
• Education, street lights,
roads, police provided
by the state.
• Why these goods?
• Market failure
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Mixed economy
How to produce...?
• Private sector – goods provided by
businesses to make a profit, maximise
quality, minimise costs.
• Public sector – services provided by
government organisations and hopefully
supplied efficiently
• Public sector pays private sector to carry out
jobs (construction, prisons, motorways, etc)
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Mixed economy
For whom to produce...?
• Private sector – goods sold to anyone
who can afford them.
• Public sector – provided for free, paid for
by taxes.
• Public sector also provides for people
who cannot work (disabled,
unemployed, sick) through the benefits
system.
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
How mixed..?
• It depends on the government or
the party in charge
• Generally, left-wing states spend
more as % of GDP
• This usually means better social
provision but higher taxes.
• https://data.oecd.org/gga/generalgovernment-spending.htm
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Question 2 – Ukraine – pg 48
a) Before 1991, and the break-up of the Soviet empire, the Ukraine had a planned economy.
During this time large and inefficient state-owned factories, enterprises, and collective
farms wasted resources and emphasised quantity over quality. Prices were set by the state
and consumer goods were often in short supply. There was also heavy spending on military
goods at the expense of consumer goods. These problems are typical of those faced by
planned economies.
b) When the Ukraine broke away from the Soviet empire, it adopted a mixed economy
approach to resource allocation. To help the development of markets, the government took
a number of measures. It reduced the number of government organisations so the public
sector is now smaller. It improved the tax system and created a legal environment to
encourage entrepreneurs, which will help businesses to flourish. It also reduced military
production and converted military factories so that they can produce consumer goods.
These measures will encourage the production of consumer goods in the private sector.
(c) In an open economy there is international trade. This means that a country both exports
and imports goods. The graph in Figure 2 shows that both exports and imports for the
Ukraine have more than doubled in recent years. The growth in international trade has
been consistent since breaking away from Soviet control. Also, for the first time in 2006,
imports ($43.8bn) exceeded exports ($42.2bn).
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
What is efficiency?
• Producing goods at the lowest possible
cost.
• Minimising the quantity of resources
that are needed to produce goods.
• Only producing those goods that are
needed by people.
• Why is the private sector thought to be
more efficient than the public sector?
• Competition in the market!
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market failure
• Where markets lead to inefficiency
and resources can be wasted.
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market failure
Externalities
• Additional costs of
production not met by a
firm.
• Pollution generated during
production.
• These affect other people –
negative externalities.
• The market doesn’t ensure
the firm will pay to clean
up.
• The public sector can create
anti-pollution laws to help
correct this
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market failure
Lack of competition
• One dominant firm can exploit
consumers, charging higher prices
and restricting choice
• http://www.therichest.com/business/
companies-business/six-enormousmonopolies-past-and-present/
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market failure
Missing markets
• Public goods – not provided by the
private sector
• Examples – street lights, defence, police.
• Why? Free rider problem, can’t restrict
consumption.
• Merit goods – underprovided by the
private sector (education, healthcare).
Expensive but essential so the public
sector provides them free of charge.
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market failure
Lack of informtion
• Barry arrives in Switzerland from the UK.
How can he get the best deal for health
insurance.
• http://www.businessinsider.com/thebiggest-lies-ever-told-by-majoradvertisers-2012-11?op=1&IR=T/#thatlisterine-cures-everything-fromdandruff-to-cuts-and-bruises-18
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Market failure
Factor immobility
• Is capital and labour mobile?
• Can it be moved from one use to
another?
• Machines might have to be scrapped
• People need to be retrained
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Economics in practice – Mixed economies
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 12: The mixed economy
Chapter Review: ActiveBook
• Chapter 12 quiz
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 11: Resolving scarcity
Key words – Resolving scarcity
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Economy
Efficiency
Market failure
Merit goods
Mixed economy
Private sector
Public goods
Private sector
Add these to your Key words glossary and learn
them!!
SECTION A: The Market System | Part 2: The role of the market in solving the economic problem | Chapter 11: Resolving scarcity