1.1.6: Types of economy

• Free market economy: An economy where the price mechanism allocates all resources
• Characteristic of a Free Market economy: Private ownership of resources
• Characteristic of a Free Market economy: Economic agents are all motivated by self interest
• Characteristic of a Free Market economy: Consumers have free will to choose what goods and services to buy
• Characteristic of a Free Market economy: Income depends on value of someone's work
• Characteristic of a Free Market economy: Resources are allocated by the price mechanism
• Advantage of a Free Market economy: Consumers have freedom of choice
• Advantage of a Free Market economy: Incentive to work harder for higher wages, raising productivity
• Advantage of a Free Market economy: Firms are in competition, leading to lower prices
• Invisible hand: Adam smith believed that if agents all act in their best interests, the market will automatically allocate scarce resources
• Disadvantage of a Free Market economy: Income inequality
• Disadvantage of a Free Market economy: Market failure can occur, reducing social welfare
• Disadvantage of a Free Market economy: Lack of provision of public goods by the free market
• Disadvantage of a Free Market economy: Over provision of demerit goods and under provision of merit goods
• Disadvantage of a Free Market economy: Exploitation of labour, as some workers may be paid very little
• Command Economy: An economy where all resources are allocated by the government
• Characteristic of a Command Economy: Government owns all resources, and decides what to produce, how to produce it and for whom to produce for
• Characteristic of a Command Economy: Goods are allocated through rationing
• Characteristic of a Command Economy: Workers are given a job by the government, and are all paid the same
• Advantage of Command Economy: Relatively even distribution of income
• Advantage of Command Economy: No unemployment as workers are given jobs by the state
• Advantage of Command Economy: Decisions are made for national interest rather than individuals
• Disadvantage of Command Economy: Government failure may occur
• Disadvantage of Command Economy: The government may make mistakes as they must control so many resources
• Disadvantage of Command Economy: Lack of choice and free will for consumers as products are the same
• Disadvantage of Command Economy: Lack of incentive to be innovative
• Disadvantage of Command Economy: Lack of incentive to work hard, as everyone is paid the same, leading to decreased productivity
• Mixed Economy: An economy with characteristics of Free Market and Command economies. Resources are allocated by the price mechanism, but governments intervene to correct failures
• The majority of countries in the world are Mixed Economies