1.1.6 Free Market Economy, Mixed Economy and Command Economy

Question 1

What is an economic system?

Answer 1

A network of organisations used by society to resolve the basic economic problem of what, how much, how and for whom to producer e.g. to address scarcity, sustainability and equity (value)

Question 2

What is a free market economy?

Answer 2

An economy in which market forces (price mechanism- supply and demand) are allowed to guide the allocation of resources
- factors of production are privately owned
- essentially the pursuit of self interest drives allocation of resources
- property rights- the legal system focuses on protecting rights and supporting the private sector of the economy
- free trade- freedom to trade internationally and promote free movement of capital and labour

Question 3

What are the characteristics of a free market economy?

Answer 3

• Private ownership of resources
• Market forces e.g. supply and demand determine prices (price mechanism)
• Producers aim to maximise profits
• Consumers aim to maximise utility (satisfaction)
• Resources are allocated by price mechanism

Question 4

What are the advantages of free market economies?

Answer 4

• Consumer sovereignty- this implies that consumer spending decisions determine what is produced
• Flexibility- free market system can respond quickly to changes in consumer wants
• No bureaucracy- officials are not needed to allocate resources (regulations/ rules/ paperwork etc.)
• Efficiency- competition and profit motive help to promote an efficient allocation resources (reduces costs as they try to make the most profit and the profit motive stimulates capital investment)
• Increased choice- consumers have a wide choice of goods and services compared with a command economy
• Economic and political freedom- consumers and producers have the right to own resources

Question 5

What are the disadvantages of free market economies?

Answer 5

• Inequality- those who own resources are likely to become richer than those who do not own resources (privately owned)
• Trade cycles- free market economies suffer from instability in the form of booms slumps (busts)