1.1.6 Free market economies, mixed economy and command economy

Free market economy

• Individuals are free to make their own choices

• Own the factors of production

• No government intervention

• Resources are allocated through the price mechanism.

• Supported by Adam smith (laissez-faire ) and Friedrich Hayek

Command economy

• All factors of production, except labour, is owned by the state

• No private property

• Resource allocation is carried out by the government, rather than the price mechanism

• all workers no matter their job, tend to receive the same wage, products are standardised

• Supported by Karl Marx

Mixed economy

• A form of compromise economy

• Free market mechanism and government allocate resources

Free market: Pros/Cons

• + Consumer Choice

• + Innovation

• - High inequality

• - Monopolies

Command economy: Pros/Cons

• + Minimum standard of living

• +Less Inequality

• + Pool resources

• - No incentive for workers and businesses

• - Consumers wants not expressed in the market(Information failure)

Role of the state in a mixed economy

• Redistributes income

• Stabilises the economy

• Creating a framework of rules