MARKET SYSTEMS

PRE ORDINARY LEVEL

(GRADE 8)

EDEXCEL,CAMBRIDGE
BY : WASIM
& LOCAL SYLLABUS
IMTIASZ
PGD in Business Administration (UoWL)
1st Class BA (Hons) Business Mgt (MDX-UK)
Edexcel Dual HND (UK)
CIMA Passed Finalist
ACCA Finalist

No 106 S.de.S Jayasinghe Mw, Kohuwala,

Nugegoda
No 337/1 Negambo Rd,Wattala
 Platinum Business Academy
No 106, SDS Jayasinghe Mw,
Kohuwala

MARKET SYSTEMS
Market Systems refer to how an economy is being controlled. It can either be
the public sector or the private sector or it could be by both sectors combined
Page | 1 together to run the economy and allocate resources.
Market systems can broadly be categorized into three main areas;
1. Market Economy / Free Market Economy
2. Command Economy / Planned Economy
3. Mixed Economy

Public vs. Private Sector

❖ The public sector is owned and controlled by the central or local government.
The public sector provides goods and services that are not provided
(underprovided) by the private sector.

❖ The main aim of the public sector is to maximise the WELFARE OF THE
SOCIETY.

❖ This means, the government is planning to satisfy the population in the

country and is not aiming to make any profits from their action.

Goods provided by the public sector

Public Goods Merit goods and services

❖ Public Goods – These are goods that are not provided by the private sector.
Therefore it is the government’s duty to provide them for the general public.
Examples include; Street Lighting, Defense

Wasim Imtiasz
PGD in Business Administration (University of West London), BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in BM & HR (UK)
 Platinum Business Academy
No 106, SDS Jayasinghe Mw,
Kohuwala
❖ Merit Goods – These are goods that the government believes that everyone
must have. Though the private sector provides these goods, they can be
expensive so the government would provide these goods for the people who
cannot afford them. Examples include; Education and Healthcare
Page | 2
❖ The private sector on the other hand provides consumer goods and services
that are only for the consumers who can offer them. Though the quality may
be high, it is still expensive for consumers.

❖ The main aim for the private sector is to generate profits and at most times
they would not aim for any social welfare.

Wasim Imtiasz
PGD in Business Administration (University of West London), BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in BM & HR (UK)
 Platinum Business Academy
No 106, SDS Jayasinghe Mw,
Kohuwala
The Three Types of Economies
Market Economy/Free Market Economy
Market Economy refers to the economic structure that is planned and controlled
Page | 3
by the private sector.
✓ Resources are allocated
✓ Prices are determined
These functions are done by the private sector and uses a technique called the
Price Mechanism.
Price mechanism is the tool that is used to determine the price, as resources are
planned by the private individual firms. There is minimal interference from the
government.
Price Mechanism refers to the system where firms get together and trade
together and make decisions in a collaborative manner.
In this economic system, there is minimal interference from the government.

Command Economy
Command economy is the opposite of the market system. This is where the
economy is controlled by the GOVERNMENT (PUBLIC SECTOR).
The economy’s ownership and allocation of resources are done by the
government. This is where the government would have a very high degree of
power in managing and controlling all resources, production and consumption.
The government would decide how much production and how much
consumption would exist within the economy.
This might also have its advantage as resources are distributed fairly because
the government will benefit households since their main aim is to maximise the
welfare of the society.
Example: Former Russia and communist countries
Former Sri Lankan Regime

Wasim Imtiasz
PGD in Business Administration (University of West London), BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in BM & HR (UK)
 Platinum Business Academy
No 106, SDS Jayasinghe Mw,
Kohuwala
Mixed Economy
Contrary to the previous two economic structures, it was later understood by
countries that both private and public sector must work together so resources
Page | 4
can be allocated more effectively in the economy.
Therefore the mixed economy was introduced.
This is where both public and private sectors jointly run the economy and
allocates goods and services for the population.
Therefore, private sector provides consumer goods and services which people
buy when they have the affordability whereas the public sector provides public
goods and merit goods and services for the betterment of the society.
A combination of both of these sectors will therefore benefit the economy
tremendously.

In a mixed economy both public and private sector run, hence prices are
determined by the joint collaboration of the price mechanism and the
government’s influence.

Wasim Imtiasz
PGD in Business Administration (University of West London), BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in BM & HR (UK)
 Platinum Business Academy
No 106, SDS Jayasinghe Mw,
Kohuwala
Free Rider Problem
Public goods that are provided by the government have two main features;
1. Non Rivalry
Page | 5 2. Non Excludability

Non Rivalry refers to where there is no competition in consumption. Public

goods are free for everyone to enjoy therefore everybody has the opportunity
to access public goods.
Non Excludability refer to where a person cannot be excluded from consuming
a public good. There is no barrier that will prevent anyone from accessing the
public good and hence a person specifically cannot be stopped from using a
public good. For example, you cannot ask a person to stop enjoying the benefit
of a streetlight.

As evident, when public goods are being provided, making it available for
everyone will create a problem. This problem is referred to as the free rider
problem.

Definition of the free rider problem:-

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Wasim Imtiasz
PGD in Business Administration (University of West London), BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in BM & HR (UK)
 Platinum Business Academy
No 106, SDS Jayasinghe Mw,
Kohuwala
The Role of Mixed Economy in solving Basic Economic Problems

What to Produce?
Page | 6
The private sector provides goods and services for the people who have the
affordability to demand for them. Therefore public sector will provide goods and
services catering to peoples wants most of the time as they aim for profit.
The government will provide goods and services that are underprovided by the
private sector.

How to Produce?
Private sector – Aims profit – Must use methods that will reduce costs (cost
efficient)
Public sector – Aims welfare for the society – Must be more productive and try
to employ more efficient workers and systems.

Whom to Produce?
Private sector provides consumer goods and services for the people who can
afford them which includes the richer population and the people who have
sufficient funds to enjoy them.
On the other hand, the public sector provides goods and services for the people
free of charge which are funded through taxation. So all people are eligible for
goods and services provided by the public sector.

Additional Notes:

Wasim Imtiasz
PGD in Business Administration (University of West London), BA (Hons) Middlesex University (UK), CIMA
passed finalist, ACCA finalist, Edexcel Dual HND in BM & HR (UK)