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The Nature of Economics

Free market, command and mixed economies

  • 3 things to know
  • Papers 1 and 3

Overview

Recall questions on the three ways of allocating resources, and on Smith, Hayek and Marx on why one is preferable to another.

What you need to know

Answer each one before you reveal it.

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Evaluation

What concept did Adam Smith use to explain how self-interested behaviour in free markets benefits society?

Key term

In a free market economy, who determines what goods and services are produced?

Key term

In a command economy, who decides the three basic economic questions of what, how, and for whom to produce?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Define a free market economy.

    Model answer

    An economic system where resources are allocated through the price mechanism with minimal government intervention, with decisions made by private individuals and firms.

  2. 2

    In a free market economy, who determines what goods and services are produced?

    Model answer

    Private individuals and firms, responding to consumer demand through the price mechanism.

  3. 3

    Define a command economy.

    Model answer

    An economic system where the government owns the means of production and centrally plans what to produce, how to produce, and for whom to produce.

  4. 4

    In a command economy, who decides the three basic economic questions of what, how, and for whom to produce?

    Model answer

    The government makes these decisions through central planning.

  5. 5

    What is a mixed economy?

    Model answer

    An economic system that combines elements of both free market and command economies, with both private and public sector involvement in resource allocation.

  6. 6

    What concept did Adam Smith use to explain how self-interested behaviour in free markets benefits society?

    Model answer

    The 'invisible hand' — Smith argued that individuals pursuing their own self-interest would be guided to promote the good of society through efficient resource allocation.

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The Nature of Economics
How Markets Work
Market Failure
Government Intervention

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Higher costs shift supply .
leftwardrightwardoutward

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ANiche markets are too small to support a large producer.
BPersonal services lose their appeal once they are scaled up.
COwners may prefer control and independence to higher profit.

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Monopoly means a market dominated by one seller.
TrueFalse

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