1.1.6 Free market economies, mixed economy and command economy

Question 1

Free market economy:

Answer 1

Individuals are free to make their own choices and own the factor of production, without or minimal government intervention

Question 2

How are resources allocated in a free market economy?

Answer 2

Through the price mechanism

Question 3

Adam Smith on a free market economy:

Answer 3

Believed in the laissez-faire approach by the government

Question 4

Adam Smith’s ‘invisible hand’ theory:

Answer 4

Where there was an ‘invisible hand’ in the market, which would allocate resources to everyones advantage, and argued that the pursuit of money would lead to an economy where benefit was maximised

Question 5

Friedrich Hayek on a free market economy: (2)

Answer 5

• argued that state control of an economy leads to the loss of freedom and totalitarianism
• although individuals don’t make supply and demand decisions based on perfect information, they best know what they need in their own situation

Question 6

Advantages of a free market economy: (4)

Answer 6

• System is automatic due to the invisible hand (resources are moved out of production of a good when people stop wanting it or costs are too high)
• Consumer sovereign
• High motivation
• Competition leads to production efficiency

Question 7

Disadvantaged of a free market economy:

Answer 7

• Inequalities and disparities in wealth
• Lack of merit goods
• Externalities

Question 8

Command economy:

Answer 8

All factors of production, except labour, is owned by the state and labour is directed by the state

Question 9

How are resources allocated in a command economy?

Answer 9

by the government

Question 10

Karl Marx on command economy:

Answer 10

Despised capitalism as it caused disparities in wealth leading to communism

Question 11

Advantages of a command economy: (3)

Answer 11

• minimum standard of living
• less wastage of resources
• government is motivated by the wellbeing of the country

Question 12

Disadvantages of a command economy:

Answer 12

• Opportunity costs
• less motivation and efficiency as everyone receives the same wage
• lose their freedom

Question 13

Mixed economy:

Answer 13

A compromised economy by the free market mechanism and government

Question 14

Governments role in a mixed economy:

Answer 14

• Creates a framework of rules
• Modifies the price system
• Redistributed income
• Stabilises the economy

Question 14

Governments role in a mixed economy:

Answer 14

• Creates a framework of rules
• Modifies the price system
• Redistributed income
• Stabilises the economy