Market Economic System: three questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
In a private market system certain goods and services would not be available unless the government intervened. What does this identify in a private market?
Answer: C.
If a market will not supply something people need unless a government steps in, then the market on its own is not allocating resources to where society values them, and that is exactly what market failure means. The usual reason is that the good is a public good, non-excludable so that nobody can be made to pay and everybody can free-ride, or a merit good that people under-consume because they undervalue its long-term benefit. Either way the intervention is the response and the failure is what is being identified. Market structure describes how competitive an industry is, whether one firm dominates or many compete, so it is a description of the market rather than a judgement about the outcome. Market equilibrium is the position where quantity supplied equals quantity demanded, and a market can be in perfect equilibrium while still failing society. Market distribution concerns who ends up with the goods, which is a question of equity rather than of whether the good is supplied at all.
Question 2
China is moving towards a more mixed economic system and reducing the role of the public
sector.
Which economic policy measure might best achieve this?
Answer: B.
Reducing the role of the public sector means shifting activity into private hands, so the policy has to build up the private sector's ability to do the work. Encouraging competition among private firms does that: competition brings new entrants, forces efficiency, and creates the range of suppliers needed before the state can withdraw from an industry without leaving a gap. Creating excess capacity in state-owned enterprises moves in exactly the wrong direction, because it enlarges the public sector rather than shrinking it. Subsidising transport infrastructure is government spending, so it increases state involvement rather than reducing it, however useful the roads and railways may be. Protecting infant industries means tariffs or quotas shielding young domestic firms from foreign competition, which is intervention in the market rather than a step away from it, and it also works against the competition that the correct answer relies on.
Question 3
In a market system who has the most important role in influencing the allocation of resources?
Answer: A.
The correct answer is A: consumers.
In a market system resources are allocated by the price mechanism, and prices respond to what consumers are willing and able to buy. When consumers demand more of a good, its price rises, profits in that industry increase, and resources are drawn towards it; when they lose interest, price and profit fall and resources leave. This is consumer sovereignty: producers ultimately follow demand, because a firm that makes what nobody wants earns nothing and fails.
Why the other options are wrong:
In a market system resources are allocated by the price mechanism, and prices respond to what consumers are willing and able to buy. When consumers demand more of a good, its price rises, profits in that industry increase, and resources are drawn towards it; when they lose interest, price and profit fall and resources leave. This is consumer sovereignty: producers ultimately follow demand, because a firm that makes what nobody wants earns nothing and fails.
Why the other options are wrong:
- D, producers, decide how to produce and what to offer, but they cannot compel anyone to buy. Their decisions are attempts to anticipate consumer demand, and they are corrected by losses when they guess wrong.
- B, entrepreneurs, organise the factors of production and bear the risk. Their role is essential, but the risk they bear is precisely the risk that consumers will not buy.
- C, government officials, direct resources in a planned economy. In a market system their role is limited to correcting market failure and providing public goods.
What this practice covers
These questions are drawn from past Cambridge IGCSE papers. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on market economic system, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Saying a market economy has no government at all. It still needs laws and property rights to function.
- Confusing efficiency with fairness. A market can be efficient and very unequal at the same time.
- Listing advantages without any disadvantages when the question asks you to evaluate.
- Forgetting that the market provides no public goods, rather than too few.
- Saying the market produces "what people need". It produces what people can pay for.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Market Economic System revision notes.