Types of Economies

Question 1

What are the 3 types of economies?

Answer 1

1) Free-market economies.
2) Mixed economies.
3) Command economies.

Question 2

What is a free-market economy?

Answer 2

An economy where the majority of resources are allocated by markets instead of the government.

Question 3

What are the 3 features of a free-market economy?

Answer 3

Total market freedom, unregulated markets, promotion of the liberty of the individual.

Question 4

What is an example of a free-market economy?

Answer 4

Hong Kong.

Question 5

Who was the proponent of free-market economies?

Answer 5

Friedrich Hayek in ‘The Road to Serfdom’ (1944).

Question 6

What is a mixed economy?

Answer 6

An economy where, typically, 40-60% of resources are allocated through government planning.

Question 7

What are the features of a mixed economy (3)?

Answer 7

Invisible hand of the market, limited protectionism, laissez-faire government.

Question 8

Who was the proponent of mixed economies?

Answer 8

Adam Smith in ‘ An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776).

Question 9

What are some examples of a mixed economy?

Answer 9

The UK, China, Germany, France, USA, etc.

Question 10

What is a command economy?

Answer 10

An economy where most resources are allocated by the state.

Question 11

What are the features of a command economy (3)?

Answer 11

Collective ownership through the state, high government intervention, close links with communism.

Question 12

What are some examples of a command economy (3)?

Answer 12

Cuba, North Korea, USSR.

Question 13

What is the market mechanism?

Answer 13

The allocation of resources by bringing together both sellers/suppliers, who will produce goods and services to meet consumer needs and wants, and buyers, who will buy goods to meet their needs and wants.

Question 14

What is the alternative to the market mechanism?

Answer 14

Planning the allocation of resources through administrative decisions, e.g. to the NHS in the UK.

Question 15

What are the advantages of a free-market economy (5)?

Answer 15

1) More choice for consumers, due to competition.
2) Higher quality goods and services and more innovation, due to competition.
3) Greater efficiency in industries, due to competition.
4) Dynamic markets are a catalyst for economic growth.
5) Associated with political freedom.

Question 16

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

Answer 16

1) Choice can become the privilege of the rich.
2) Markets can be dominated and manipulated by the most successful firms.
3) Higher levels of inequality.
4) Lesser distribution of wealth.
5) Greater risk to citizens, through greater exposure to unemployment, poverty, ill-health, etc.

Question 17

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

Answer 17

1) Firms are unable to dominate and manipulate markets or exploit consumers with high prices.
2) Wealth is distributed fairer through government planning.
3) The state’s main focus is social welfare.

Question 18

What are the disadvantages of a command economy (6)?

Answer 18

1) Central planning imposes the will of a small minority on the whole.
2) Less choice, as planning produces uniform goods.
3) No incentive to innovate, due to a lack of competition.
4) Little incentive to work efficiently, as there is high job security with no profit incentive.
5) Slower economic growth compared to efficient free/mixed market economies.
6) Totalitarianism (political control).