FREE, MIXED, COMMAND ECONOMY

What is an economic system?

An economic system is the way a society organises the production, distribution, and consumption of goods and services.

What are the three main types of economic system?

1. Free market economy
2. Mixed economy
3. Command economy

What is a free market economy?

A free market economy is one where resources are allocated through the price mechanism with minimal government intervention.

What is the price mechanism?

The price mechanism is the system where prices adjust due to changes in supply and demand to allocate resources.

Which economist is most closely associated with the free market economy?

Adam Smith.

What did Adam Smith argue about free markets?

Adam Smith argued that individuals pursuing self-interest would unintentionally benefit society through the “invisible hand”.

What is meant by the ‘invisible hand’?

The invisible hand refers to the self-regulating nature of the market where individual self-interest leads to efficient outcomes.

What role does the government play in a free market economy?

The government plays a very limited role, mainly protecting property rights and enforcing contracts.

What are the advantages of a free market economy?

1. High efficiency
2. Strong incentives
3. Consumer sovereignty
4. Innovation

Why is a free market economy considered efficient?

Resources are allocated to where demand is highest, leading to productive and allocative efficiency.

What is consumer sovereignty?

Consumer sovereignty means consumers determine what is produced through their spending choices.

Why does a free market encourage innovation?

Firms innovate to gain profit and remain competitive.

What are the disadvantages of a free market economy?

1. Market failure
2. Income inequality
3. Under-provision of public goods
4. Negative externalities

Why can a free market lead to inequality?

Income depends on market value of labour and assets, which varies greatly between individuals.

What is market failure?

Market failure occurs when the free market fails to allocate resources efficiently.

What is a command economy?

A command economy is one where the government owns resources and makes all economic decisions.

Which economist is most closely associated with the command economy?

Karl Marx.

What did Karl Marx argue about capitalism?

Karl Marx argued that capitalism exploits workers and leads to inequality and class conflict.

How are resources allocated in a command economy?

Through central planning by the government rather than market forces.

What are the advantages of a command economy?

1. Greater equality
2. Provision of basic goods for all
3. Focus on social welfare

Why might a command economy reduce inequality?

Income and wealth are redistributed more evenly by the state.

Why can a command economy ensure provision of essentials?

The government can prioritise housing, healthcare, and education over profit.

What are the disadvantages of a command economy?

1. Lack of incentives
2. Inefficiency
3. Poor quality goods
4. Slow innovation

Why is a command economy often inefficient?

Planners lack price signals and information about consumer preferences.

Why does a command economy discourage innovation?

There is little personal or financial reward for innovation.

Which economist argued against government planning?

Friedrich Hayek.

What was Friedrich Hayek’s main argument?

Hayek argued that governments cannot efficiently allocate resources because they lack local knowledge.

What is a mixed economy?

A mixed economy combines elements of free markets with government intervention.

What type of economy does the UK have?

The UK has a mixed economy.

Why do most countries operate a mixed economy?

To gain the benefits of markets while correcting market failures.

What is the role of the state in a mixed economy?

1. Regulate markets
2. Provide public goods
3. Redistribute income
4. Stabilise the economy

How does the state correct market failure in a mixed economy?

Through regulation, taxation, subsidies, and provision of public goods.

What public goods are typically provided by the state?

National defence, policing, street lighting, and justice.

How does the government redistribute income?

Through progressive taxation and welfare benefits.

How does the government regulate markets?

By setting rules such as minimum wages, safety standards, and competition laws.

Why is government intervention necessary in a mixed economy?

Because free markets alone may not achieve equity or efficiency.

What is the main advantage of a mixed economy?

It balances efficiency with fairness and social welfare.

What is a possible disadvantage of a mixed economy?

Government intervention can lead to inefficiency or government failure.