1.1.6 Free market economies, mixed economy and command economy

Question 1

What type of economy is the UK?

Answer 1

A mixed economy since some decisions, such as healthcare and education, are made by the government whilst other decisions, such as businesses are made by the markets.

Question 2

What is a command economy?

Answer 2

An economy in which resources are allocated by the government.
- Sometimes known as a planned economy.

Question 3

What is a free market economy?

Answer 3

An economy in which resources are allocated by the free market.

Question 4

Examples of command economies

Answer 4

• Cuba
• Laos
• Vietnam
• China
• North Korea

Question 5

Examples of free market economies

Answer 5

• USA
• Singapore

Question 6

Examples of mixed economies

Answer 6

• UK
• France

Question 7

Advantages of free market economies

Answer 7

• Efficiency
• Entrepreneurship
• Choice
• Competition

Question 8

Disadvantages of free market economies

Answer 8

• Inequality
• Non-profitable goods would not be made
• Monopoloies
• Lack of welfare state
• Volatile economy

Question 9

Advantages of command economies

Answer 9

• Maximised welfare
• Low unemployment
• Prevention of monopolies
• Improved equality
• Provision of social goods

Question 10

Disadvantages of command economies

Answer 10

• Poor decision-making
• Restricted choice
• Lack of risk-taking and efficiency
• Possible corruption

Question 11

What might happen to public services in a free market economy?

Answer 11

The role of a private company is to make money. Public services are not profitable so in a completely free market economy, private companies would not provide unprofitable services or goods.

Question 12

What are markets?

Answer 12

Markets are a way of allocating resources.

• Each buyer or seller in a market chooses to exchange something they have for something they’d prefer to have instead.
• For example, someone’s labour (their work) is a resource. If they have a job, they exchange their labour for a salary.

Question 13

What are mixed economies?

Answer 13

An economy where resources are allocated by the government and the market.

• In a mixed economy, the government is known as the public sector and businesses that are privately owned make up the private sector.

Question 14

Market failure

Answer 14

Where the allocation of resources by the free markets result in undesirable outcomes – e.g. traffic congestion is seen as a market failure.

Question 15

What could governments do to address market failure?

Answer 15

Governments often intervene when there is market failure. Examples of ways they could do that:
- Incentive act by changing the law or offering tax breaks, influencing people’s behaviour.
- Governments can also intervene by providing goods or services.

Question 16

Who are the three ket economic thinkers included in the specification?

Answer 16

• Adam Smith
• Karl Marx
• Friedrich Hayek

Question 17

Who was Adam Smith?

Answer 17

Smith’s ideas have shaped traditional economic theory. He was a big advocate of free market economics and described how its “invisible hand” would allocate resources in society’s best interests.

He believed that in the free market, consumers’ demand and producers’ supply will lead to price levels being set at a point which benefits them both. - Consumers are motivated to maximise their own beliefs and producers are motivated to maximise profit.

Smith pointed out that in order for the free market to work property, there couldn’t be any monopolies and there would have to be low barriers to entry to maximise competition.

Smith also wrote about specialisation and division of labour.

Question 18

Who was Karl Marx?

Answer 18

Marx was critical of the free market and argued that it created a situation where a small ruling class of producers (the bourgeoisie) dominated and exploited the larger working class of wage earners (the proletariat).

Marx argued that profit-maximising bourgeois producers would exploit workers (e.g. paying them low wages and giving them few rights) until the proletariat eventually rose up in a revolution and took over. This would then lead to the workers controlling production and everyone having a share in the ownership of resources.

Marx’s ideas led to the rise of communism is the 20th century. Many communist countries collapsed in the late 20th century, which led to discrediting of communism and command economies, but Marx’s ideas are becoming more popular now.

Question 19

Who was Friedrich Hayek?

Answer 19

Hayek was a keen supporter of the free market system and a critic of command economies. He argued that governments should not intervene with the free market to allocate resources because governments lack the information required to allocate them in the way that is most beneficial to society.

Hayek believed that individual consumers and producers have the best knowledge of what they want or need, and so the allocation of resources should be left to them and the price mechanism.

Hayek saw the price mechanism as a way for producers and consumers to communicate. The price level set by the forces of supply and demand would show what both consumers and producers want and will naturally allocate resources in a much more efficient way than governments can.