Section 2: Allocation of
Resources
Unit 4: Market and Mixed
Economies
Page – 29, IGCSE and O Level
Economics by Susan Grant
Three questions arises from the economic
problem
O What goods and services should an economy
produce? – should the emphasis be on agriculture
or manufacturing. e.g. Rice for food or cotton for
garment industries?
O How should goods and services be produced? –
the production process should be labour intensive
or capital intensive? e.g. Mechanised farming or
manual farming?
O Who is to receive the products produced? – even
distribution? more for the rich? Or for those who
work hard ?
The three main Economic Systems:
1. Planned Economy
2. Market Economy
3. Mixed Economy
Characteristics of Planned Economy
• Sometimes called a command economy.
• Decisions as what to produce, how to produce, and
who to produce for, are made by a central body, the
government.
• Public or state ownership of resources
• Planned production
• Good s and services are produced to meet the
needs of the society not for profit.
• Price is fixed by the government
Example of Planned Economy is Cuba at present
and Soviet Union at the past.
Advantages of a planned economy:
• (1) As the state controls everything it can
implement economic policy and plan very quickly.
• (2) Less wastage of resources due to centrally
planned production
• (3)As government controls prices and wages there
is not much gap between rich and poor.
Disadvantages of a planned economy:
• (1) Total production, investment, trade, and
consumption, even in a small economy, are too
complicated to plan efficiently and there will be
misallocation of resources, shortages, and
surpluses.
• (2) Lack of competition may lead to poor quality
of goods and services.
• (3) Enormous bureaucracy may result in
widespread corruption.
Characteristics of Market Economies
• Also called capitalism
• Private property
• All production is in private hands
• Self interest
• A very limited role of government
• Freedom of choices.
• Price of goods and services is determined by market forces
(demand and supply) without any government
intervention.
• Few cases of surpluses and shortages
• Competition and incentive for profit maximization drive the
firms to be more productive and efficient.
The economy of USA is inclined more towards Market
Economy than any other countries in the world.
Advantages of a Market economy:
• (1) There is more freedom of choice for producers and
consumers
• (2) competition among the firms ensures greater
efficiency and customer service
• (3) More intensive for firms for innovation and better
technology
• (4) large number of civil servants are not required to
run the system.
• (5) Market economy gives great power to the
consumer.
• (6) Greater incentive and efficiency for making profit.
Disadvantages of Market economy:
• (1) Inequalities- wide gap between rich and poor
• (2) Instability due to market failure
• (3) Dominant firms can control the price and
markets
• (4) Driven by profits not social welfare so poor
people can be deprived off necessities.
• (5) Merit goods (things that are good for people,
such as education or healthcare) will be
underprovided, since they will only be produced
for those who can afford them and not for all.
Mixed Economies
• A mixed economy has a combination of features of a
planned economy and a market economy.
• Some firms are privately owned (the private sector)
and some are government owned ( the public sector)
• Some countries have high levels of planning and
government involvement in the economy (e.g. China)
• Government involvement is deemed essential, since
there are some dangers that will exist if the free
market is left to operate without interference.
In reality, most of the economies are mixed economies
like UK, India, Bangladesh etc.
Advantages of mixed economy
See page 34 of your text book.
Transition Economies
• Countries that have been moving
towards a more market-oriented
balance in their economic systems.
• Examples of countries that are in
transition: Hungary, Poland and Russia
Assess your understanding - write only the letter of correct answer in
your copy and get ready to be asked
1. Which pair of economic 2. The government of a developed
institutions can be found in country subsidizes local private
a market economy? businesses, and encourages
large foreign companies to
A. charities and public locate in the country.
corporations Which type of economic system
is this?
B. multinationals and
A. free market
commercial banks
B. mixed
C. public corporations and
C. planned
private companies
D. subsistence
D. stock exchange and
government hospitals
Assess your understanding - write only the letter of correct answer in
your copy and get ready to be asked
3. Which headline could apply to a 4. A country needs extra nurses.
mixed economy but not a free How could this be encouraged
market economy? in a mixed economy but not in a
market economy?
A. ‘Cheap imports put domestic A. Extra part-time nursing courses
producers out of business.’ could be arranged by private
B. ‘Local government planning colleges.
decision angers residents.’ B. Nurses could be given a higher
C. ‘Many fish die as a company statutory minimum wage.
pollutes a river with waste C. Nursing students could be
material.’ asked to pay increased fees.
D. ‘Small shops close as large D. Nursing training colleges could
supermarkets open in the area.’ have their subsidies reduced.
Q. Explain how resources are allocated differently in market and mixed economic
systems.[4]
Answer: In a market economy, resources are allocated through
the price mechanism. The forces of demand and supply determine
the equilibrium price. There is no government intervention and
consumers have sovereignty. Firms in a market economy aim for
profit maximization and resources are allocated by the private
sector.
However, in a mixed economy, both the public and the private
sector decide on the allocation of resources. The price system
determines the allocation of some resources in the economy but
in case of market failure or when markets are inefficient,
governments intervene e. g., in the production of public and merit
goods and taxing demerit goods. Government can also influence
the market forces through taxation, subsidies and regulations.
Allocation of resources is also influenced as a result.
