1. Free market and mixed economies LO: 1. 2. To know the
characteristics of different economic systems Understand the
advantages and disadvantages of a free market economy and why there
are mixed economies.
2. Match up the key words and definitions _______________: an
economic system where all resources are allocated through the
market forces of demand and supply, with no intervention by the
government. ________________: an economic system where all
resources are allocated by the government, with no markets (eg
ex-Soviet bloc, North Korea). ________________: an economic system
where resources are partly allocated by the market and partly by
the government (eg, most economies today). Mixed economy Command,
or centrally planned economy Free market economy
3. Free market benefits and problems Works automatically
without any government intervention the invisible hand Lack of
equality Firms may act in a socially undesirable way e.g. pollution
No expensive central planning Free People work hard market because
of incentives of better pay Competition between Some socially
desirable goods may not be provided e.g. education and street
lighting Undesirable goods may be overproduced e.g cigarettes,
addictive drugs firms keeps prices down Competition limited
Consumer sovereignty resources are allocated Encourages self
interest and
4. Mixed economy Examples of government intervention in a
market economy
5. Mixed Economy Examples of government intervention in a
market economy Interfering with prices by way of taxes and
subsidies Interfering with income by taxation and welfare payments
(to redistribute from rich to poor) Directly providing certain
goods e.g. education, defence Introducing legislation preventing
production of certain goods (illegal drugs) or safety standards in
production of other goods (fireworks) Controlling certain forms of
production by nationalisation (ownership by government
6. Jan 2010 One reason for the existence of mixed economies is
that A the profit motive is always undesirable B the free market
economy always allocates resources efficiently C competition
between firms ensures consumer welfare is maximised D the free
market economy may lead to market failure. Answer : Explanation (3)
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7. January 2012 A free market economy fails to allocate
resources efficiently to the production of public goods because A
No opportunity cost is involved in the provision of public goods. B
Providing public goods can result in a free rider problem. C Public
goods can only be provided by the private sector. D The prices of
public goods may be set at too high a level. Answer: Explanation
(3): ______________________________________________________________
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8. Sample Exam Question One reason for the UK being a mixed
economy rather than a free-market economy is: A. To reduce
Government bureaucracy and inefficiency B. To reduce income
inequality C. To increase the incentive to work D. To increase
market failure Answer: Explanation (3):
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9. Advantages of Free Markets Disadvantages of Free Markets +
Competition & Efficiency: in free markets firms compete for
profits (& survival) and therefore should strive to increase
efficiency. - Inequality: as there is no Government there will be
no state provision of benefits or public services. Therefore those
on low incomes, the underprivileged & the disabled will
struggle to survive and could remain in poverty. - Market failure:
there are other market failures + Consumer Choice: also in order to
that occur when free markets dont allocated survive and make
profits businesses must resources efficiently: match their
production to what consumers want to buy. There should also be more
e.g. dominant firms may charge high prices firms competing,
offering different goods & e.g. some goods may be
under-provided, such services which will aid consumer choice. as
healthcare & education e.g. some goods may be over-provided,
such + Incentives & Economic Growth: in a free as cigarettes,
alcohol & CO2 market there is no (or low) income or corporation
tax. This gives workers a greater incentive to work and businesses
more incentive to make profits. These incentives should help fuel
higher economic growth.