1.1.6 Free market economies, mixed economy and command economy

• Free market economy:


  Resources are allocated through markets with no government intervention.
• Command economy:


  Resources are allocated by the government.
• Mixed economy:


  Resources are allocated by a combination of markets and the government.
• Advantages of a free market economy

  -More choice and higher quality products for consumers as many businesses are competing to satisfy their needs in order to make a profit.

  -Greater efficiency as firms need to keep costs low to survive in competitive markets.
• Disadvantages of a free market economy

  -Greater inequality as entrepreneurs and the owners of capital tend to accumulate the most wealth.

  -Possibility of market failure.
• Advantages of a command economy

  -Reduced inequality. As the government allocates resources, they can ensure that income and wealth are more evenly distributed.

  -Government policy can be used to address market failure.
• Disadvantages of a command economy

  -Less choice and quality of products for consumers. The govt is not trying to make a profit, so it has less of an incentive to satisfy consumers.

  -Less efficiency as the govt isn't motivated by profits they don't have the incentive to reduce costs and use resources efficiently.
• Adam Smith (free market approach)


  -Favoured a free market approach

  -Thought that economies functioned best when individuals were free to act in their own self-interest.

  -Believed that specialisation and the division of labour was important for economic success.
• Karl Marx (command economy)


  -Thought that capitalism and free markets were inherently unstable due to the inequality that they create.
• Fredrick Hayek (free market approach)


  -Thought that governments were incapable of allocating resources efficiently, and so favoured free markets.