Lesson 14 — Activity 1: What Is a Market Economy?

In this first activity, we will begin by looking at different types of economies by looking at the term market economy. What does the term market economy mean? What are the advantages and disadvantages of a market economy?

There are four main types of economic systems in the world: traditional, command, market, and mixed. A traditional economy is where traditions, customs, and beliefs shape the goods and the services the economy produces, as well as the rules of how they are distributed. An example of a traditional economy would be used among the Inuit people of northern Canada. The second type of economy is the command economy. A command economy is an economy in which production, investment, prices, and incomes are determined centrally by a government. The command economy is a key feature of any communist society. Cuba, North Korea, and Russia are examples of countries that have command economies.

Although there are four main types of economic systems, the two you will focus on in this theme are the market and mixed economies. Let's begin by learning about the market economy.

A market economy (sometimes called a "free market") is one that is based on supply and demand. It is when choices are made by a consumer and a producer who interact with each other. Consumers are free to buy whatever product they want. Companies are free to make whatever product they want. There is little government intervention, which allows the economy to sort itself out through competition.

@gettyimages

• A consumer is you, or someone like you, who is purchasing goods.

• The producer is the person you are buying from, and they decide what to produce, how much to produce, and what to charge customers for those goods.

These two types of people interact with each other and decide what they will purchase and produce.

Market economies have a fundamental principle of freedom:

• freedom as a consumer to choose among products and services
• freedom as a producer to start or expand a business
• freedom as a worker to choose a job or career, join a labour union, or change employers

In a market economy, an individual's income will rise and fall depending on their success. An individual does not depend on community success, but rather, on their own success. Everything is driven by supply and demand, which allows for an individual to gain success and wealth. All decisions in a market economy are influenced by the pressures of competition, supply, and demand.

Self-check!