1.1.6 Free market economies, mixed economy and command economy

Question 1

What is a free market economy?

Answer 1

• The free market will allocate resources automatically without any need for government intervention.
• All economic decisions are taken by households and firms who are assumed to act in their own self interests.
• Resources are automatically allocated through the interaction of demand and supply and the price mechanism.

Adam Smith: said that without the need for costly and complex bureaucracies, the free market will result in an efficient allocation of resources. The pursuit of private gain results in the social good.
E.g. Hong Kong, Singapore

Question 2

What is a mixed economy?

Answer 2

A mixed economy is one where resources are allocated partly by government, and partly by the market mechanism. The mix varies from country to country.
E.g. UK, Germany, USA

Question 3

What is a command economy?

Answer 3

• Governments will own some or all of the industries producing goods and services.
• Production is decided by the government agencies, who decide which products are the most socially efficient to produce.
• In the command economy, the government will have overwriting macroeconomic objectives such as employment rates and what to produce.
  E.g. China, North Korea, Cuba