Market Economy / Free Market Economy

Features

o All resources are privately owned by people and firms.

o Every business will aim to maximise profit, i.e. profit is the main motive.

o There is consumer sovereignty → Consumers control producers! Wants and needs of

consumers control the output and decisions of producers.

o Firms will only produce goods which consumers want and are willing to pay for (less

wastage / surpluses / shortages).

o Price is determined through the price mechanism (demand and supply).

o E.g. Hong Kong and Singapore are among the freest in the world (but not 100%)

Advantages

o Market economies respond quickly to people’s wants

o There is a wide variety of goods and services in the market.

o New, better methods of production (innovation) encouraged, leading to lower costs.

Disadvantages

o Public goods may not be provided for, so the government will have to interfere to provide these
types of goods through funding from taxes, e.g. streetlights.

o Market economies encourage consumption of harmful goods/demerit goods.

o Prices keep changing as they are determined by demand and supply.

o Social costs may not be considered while producing goods and services (e.g. not eco-friendly)

Planned Economy / Command Economy

Features

o Government decides how all scarce resources are to be used.

o Government decides what and how much to produce and the price to charge for foods and
services.

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o Public sector and the government play an important economic role.

o E.g. North Korea, Cuba, (China was a command economy turned mixed economy)

Advantages

o No competition between firms, thus resulting in less wastage (like through

unnecessary advertising).

o Government helps ensure that everybody is employed (aim: full employment).

o Smaller gap between the poor and rich (a more equal distribution of wealth).

Disadvantages

o No incentives for businesses to produce and innovate.

o No consumer sovereignty as the production of goods is decided by government.

o Businesses usually are less efficient because of lack of the profit motive.

o May have large surpluses/shortages of certain goods and services (because hard for the
government alone to realise the needs of everyone .

Mixed Economy (Private and Public Sector)

Features

o A mixed economy is a combination of the market economy and government planning

(has features of both economies), which allows it benefit from and avoid problems that

arise from being on one side of the spectrum (either market or planned only).

o Has both the private sector and public sector, i.e. some businesses are owned by

private individuals, some by the government.

o Note: Most countries in the world are mixed economies, e.g. UK, USA, France

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PRIVATE SECTOR

o Decisions are made by business themselves. (But there is likely to be still some government
control over these decisions)

Advantages (due to the profit motive)

▪Efficient production and use of scarce resources: cut costs and wastes

▪ Innovation (of products and production methods): cut costs, boost sales and profit

▪ Competition: helps lower prices and improve quality

▪ Quick response to changes in consumer wants and spending patterns (demand)

▪ Wide variety of goods and services produced to satisfy consumer wants (demand)

Disadvantages

▪ Reduced employment (to cut costs)

▪ Less likely to focus on social objectives and benefit to society (e.g. eco-friendly)

▪ High prices for essential services

▪ No production of certain essential goods and services just because it is not profitable

PUBLIC SECTOR

o Decisions made by the government and public authorities.

Some goods and services are free of charge, highly subsidised, or still produced even if they are
not profitable. Funding comes from taxes (taxpayers).

E.g. public transport, state healthcare, education, electricity and water supply, defense

o Public sector enterprises may receive support (e.g. subsidies) OR able to run on their own and
make a profit.

Public sector organisations

▪ Government authorities (taxation department like Zimra)

▪ Government agencies (e.g. intelligence agency, food standards agency)

▪ Public corporations (like businesses) (e.g. hospital, central bank)

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PRIVATISATION

o The selling or transferring of public sector businesses to the private sector

o Purpose: to benefit from the efficiency of the private sector (advantages)

o In many European and Asian countries, the water supply, electricity supply, and public
transport systems have been privatised.

Advantages of reducing the size of the public sector (privatisation)

▪ More efficient allocation and use of limited resources will cut costs and increase output

▪ Less government funding and burden on taxpayers

▪ Lower prices and higher quality, due to more competition for customer and sales

▪ Private sector firms respond to new business opportunities and create more jobs, income, and
output

o Opposite: nationalised businesses – once owned by private individuals but bought by the
government

Note “Decisions” include what to produce, how to produce, what price to charge

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ENTERPRISE, BUSINESS GROWTH AND SIZE

Entrepreneurs

Entrepreneur – A person who takes risks and make decisions needed to organise resources to
produce goods and services and to start and operate a business venture.

Advantages Disadvantages
Make use of personal ideas, skills, and interest Risk of failure, especially with poor planning
Independence: choose how to use time and Increased responsibility
money
Increased motivation Longer hours of work
Potential to earn higher incomes (than regular No steady income from regular employment in
employees) another business (opportunity cost)
May become famous and successful if their Need to invest own money and possibly also
business prospers find other sources of capital

Characteristics of successful entrepreneurs

BUSINESS PLANS

A Business plan is a written statement about the business proposal, with important information
about the business, such as its objectives, strategies, products, market, and financial plans and
projections.

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Functions of a business plan

1. Support an application for external funding (e.g. applying for bank loans, to convince
investors)
2. Reduce risk of business failure by allowing the entrepreneur to:
▪ Assess how successful and reasonable the business idea is
▪ Organise ideas and identify lacking information and have a focus
▪ Set out the objectives and how and when to achieve it
3. A standard by which to measure progress and success in a business

Contents of a business plan

1. Objectives → goals the business wants to achieve

2. Product description → goods/services offered by business

3. Production plan → what factors of production (land, labour, capital) are required, where
(location) and how to produce

4. Market assessment → target customers, competitors, pricing strategy, market potential

5. Financial plans and projections → source of finance, projected (estimated / predicted)

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 Format of a Business Plan

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