1.1.6 Free market economies, mixed economy and command economy

Question 1

What are the three economic questions?

Answer 1

1) What to produce?
2) How to produce?
3) Whom to produce for?

Question 2

Features of the command/planned economy (3)

Answer 2

• the government owns all the factors of production (resources)
• relies entirely on the public sector to choose, produce and distribute goods
• everyone has a job

Question 3

Advantages of the command/planned economy (4)

Answer 3

• society is more equal (maximising social welfare)
• prevention of monopolies
• provision of public goods
• no unemployment

Question 4

Disadvantages of the command/planned economy (4)

Answer 4

• less/no competition
• very bureaucratic
• inefficient (allocation of resources)
• no choice/innovation for consumers

Question 5

Features of the free market economy (4)

Answer 5

• limited role for the government
• competition in the economy
• free trade
• individual ownership

Question 6

Advantages of the free market economy (4)

Answer 6

• more choice for consumers (creativity/innovation)
• more efficient
• the market allocates resources according to demand (equilibrium)
• competition

Question 7

Disadvantages of the free market economy (6)

Answer 7

• unemployment
• unstable working conditions
• failure to produce certain goods and services (necessities)
• harmful/wasteful goods are more likely to be produced (externalities)
• inequality/wealth gap
• monopolies/profit maximisation by firms

Question 8

What is the mixed economy?

Answer 8

An economy where both the government and private firms provide goods and services

Question 9

What is the role of the government in a mixed economy? (5)

Answer 9

Key industries:
- education
- healthcare/welfare
- infrastructure
- defense
- subsidies

Question 10

What economic system did Adam Smith believe in?

Answer 10

Free market economy. He believed that:
- resources were most efficiently allocated due to people acting in their own self-interest
- businesses aimed to maximise profit and consumers utility
- the market would allocate the demand/supply by itself via the invisible hand (price mechanism/market forces)

Question 11

What economic system did Karl Marx believe in?

Answer 11

Command/planned economy. He believed that:
- free market economies led to the exploitation of workers as businesses maximise profit
- competition would lead to businesses closing down and monopolies to form

Question 12

What economic system did Friedrich Hayek believe in?

Answer 12

Free market economy. He believed that:
- the market allocates resources more efficiently than the government
- however, government intervention was necessary for the provision of public goods