Free Market and Mixed Economies

Question 1

What is a market economy?

Answer 1

A market economy is one where resources are allocated by the forces of supply and demand and relies on the price mechanism model.

Question 2

What are the characteristics of a market economy? (3)

Answer 2

1) No government intervention.
2) Uneven distribution of income.
3) Privately owned resources.

Question 3

What are the advantages of a market economy? (3)

Answer 3

1) The market can respond very quickly to a change in demand.
2) There is lots of competition for business so prices will be driven down which may be of benefit to consumers.
3) Companies will be competing for business so may invest heavily in R&D so they have the best possible products to attract consumers.

Question 4

What are the disadvantages of a market economy? (5)

Answer 4

1) There will be huge inequality.
2) There will be under consumption of merit goods.
3) There will be over consumption of demerit goods.
4) There will be a lack of supply for public goods.
5) There will be lots of manufacturing which will cause pollution and so damage the environment.

Question 5

What is a mixed economy?

Answer 5

A mixed economy is a combination of the free market and government intervention to allocate resources.

Question 6

Why do we have mixed economies?

Answer 6

We have mixed economies to reduce the disadvantages of the market economy model and correct market failures through government intervention.