1.1.6 Free market economics, mixed economy and command economy

Question 1

Free market economy

Answer 1

An economic system where the prices of goods and services are set freely by the forces of supply and demand or without any government intervention.

Question 2

Advantages: Free market economy

Answer 2

-Consumer sovereignty -consumers have freedom of choice
-Productive efficiency - firms are in competition to produce goods at the lowest cost they can
-Reduced risk for government failure - as governments do not know what is demanded

Question 3

Disadvantages: Free market economy

Answer 3

-Boom-bust cycles: Free markets can be prone to economic cycles of booms and busts.
-High levels of inequality - the rich tend to own the factors of production, so can grow quicker
-Lack of public goods-some services may be underprovided without government intervention

Question 4

Command economy

Answer 4

An economic system where all economic decisions are made by the state, or all factors of production, except labour, is owned by the state.

Question 5

Advantages: Command economy

Answer 5

Equality: command economies aim to reduce inequality through central planning
Prioritising social goals: Resources can be directed toward public services and social welfare

Question 6

Disadvantages: Command economy

Answer 6

Lack of Incentives: Central planning may discourage innovation and initiative:
Resource Misallocation: Inefficient allocation of resources can lead to shortages or surpluses.
Bureaucracy: Decisions making will be slow and go through various stages.

Question 7

Mixed economy

Answer 7

An economic system where the prices of goods and services are partly set by the price mechanism and partly by the state.

Question 8

Roles of the state in a mixed economy: Welfare and Redistribution

Answer 8

Governments implement social safety nets and income redistribution policies to address poverty and inequality.

Question 9

Roles of the state in a mixed economy: Public goods and services

Answer 9

The government provides public goods and services that may not be adequately supplied by the private sector, including infrastructure, education, and healthcare.

Question 10

Roles of the state in a mixed economy: Regulation

Answer 10

The state regulates various aspects of the economy:
i.e. It prevents the abuse of monopolies to ensure, they aren’t taking advantage of the lack of competition i.e. charging higher prices/provide a poorer service.