5.

ANSWERS: The Free Market versus Mixed Economies

1. economic…price…capitalism…rise…state…taxation

2.

3. The free market has the following key characteristics;

a) Economic agents- consumers, producers, owners of private property (land/capital), government.
b) Consumers, producers and property owners motivated by self-interest. Consumers aim to maximise their utility,
producers their profits and owners of private property aim to maximise their wages, rent, interest and profits.
c) Free Enterprise- all agents in economy free to make own economic decisions. Consumers decide what to buy,
workers where and for whom to work, firms what and how to produce.
d) Competition- will exist if agents free to allocate their resources as they wish.
e) Decentralised decision making- no single body responsible for allocating resources. The allocation of resources is
achieved by the decisions of individual economic agents. The price mechanism and the ‘invisible hand’ of the free
market economy.
f) Limited government intervention.

4.1
In mixed economies, the government can control relative prices by taxing/subsidising goods as it sees fit, as well as
controlling relative incomes through taxes on income, benefits etc.
The government also has a legislative role to fulfil in order to ensure the official operation of the private sector, and
provide public goods.

4.2
Lower prices
Higher quality goods
Greater innovation
Encourages firms to become more efficient, fewer scarce resources used

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