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A-Level · Microeconomics

ECO.MIC25 Economic Systems: Market, Mixed and Planned Economies

AQA 7136 · Calculators not allowed · about 75 minutes

Total Marks

Name: _______________________________ Date: ____ / ____ / ______

Answer all questions. Questions 12 and 11 require full sentences. Allow about 75 minutes. Write working where calculations or stepwise reasoning are required.

Define a free market economy as used in discussions of resource allocation and economic systems.

(Total for Question 1 is 2 marks)

Define a planned (command) economy in the context of how it answers the what/how/for whom questions.

(Total for Question 2 is 2 marks)

Define a mixed economy and state one reason governments adopt mixed systems.

(Total for Question 3 is 2 marks)

Distinguish the price mechanism in a market economy from central planning in a command economy, focusing on how each determines 'what to produce'.

(Total for Question 4 is 3 marks)

Explain the role of private property and the profit motive in allocating resources in a market economy.

(Total for Question 5 is 3 marks)

State two advantages of a mixed economy compared with a purely planned economy, in the context of resource allocation.

(Total for Question 6 is 3 marks)

State two disadvantages of a command economy for answering the how and for whom questions of allocation.

(Total for Question 7 is 3 marks)

Classify each of the following real-world examples as best described by a market economy, a mixed economy, or a planned economy. Examples: A: US technology sector (private firms, little state ownership); B: UK National Health Service (publicly funded universal healthcare); C: Cuba's national agricultural sector in the 1980s (state ownership and central planning); D: Sweden's welfare-state model (extensive public services with private markets); E: North Korea's national industry today (near-total state control). For each example, write Market, Mixed or Planned.

(Total for Question 8 is 5 marks)

Explain how the profit motive in a market economy helps answer the 'what to produce' question, and give one limitation of relying on profit signals alone.

(Total for Question 9 is 4 marks)

Explain how a command economy typically answers the 'for whom' question, and identify one equity advantage and one efficiency disadvantage of that approach.

(Total for Question 10 is 4 marks)

Compare briefly the likely outcomes for productive efficiency and allocative efficiency in a market economy versus a planned economy. Give two comparative points and a short conclusion.

(Total for Question 11 is 6 marks)

Discuss whether a mixed economy is always preferable to a purely free market economy for answering the what/how/for whom questions of resource allocation. In your answer consider efficiency, equity, incentives, information problems and practical constraints. You should reach a supported judgement.

Evaluate the view that a mixed economy is always preferable to a purely free market economy for allocating resources.

(Total for Question 12 is 15 marks)

Mark scheme · ECO.MIC25 Economic Systems: Market, Mixed and Planned Economies

Question 1

B1 an economy where most resources are allocated through private markets via price signals and voluntary exchange, with limited government intervention
B1 private ownership of most factors of production and firms responding to profit incentives
Answer: An economy in which private markets and prices allocate resources, firms are privately owned and respond to profit incentives, with limited state intervention.

Question 2

B1 an economy in which resource allocation decisions are made centrally by the state or planning authority rather than by markets
B1 state ownership of major resources and production targets set centrally to determine what, how and for whom to produce
Answer: An economy where a central authority decides resource allocation and production, with state ownership and planning used to answer what, how and for whom to produce.

Question 3

B1 an economy combining private markets and public sector provision, where both market mechanisms and government intervention shape resource allocation
B1 reason example: to correct market failures or provide public goods, or to pursue redistribution and social objectives
Answer: A mixed economy combines private markets with government provision and intervention; governments adopt it to correct market failures or provide public goods and redistribution.

Question 4

B1 price mechanism: consumer demand and relative prices signal to firms what is profitable to produce, so 'what to produce' responds to willingness to pay
B1 central planning: planners set production targets and output mixes according to a plan or political priorities, not price signals
B1 contrast: market uses decentralised information and incentives via prices and profit, while command uses centralised information and administrative directives
Answer: Price mechanism relies on prices and profit signals from consumers and firms to decide what to produce; central planning uses state targets and directives to set output regardless of market prices.

Question 5

M1 private property gives owners control over resources and the right to buy, sell or hire them, creating incentives to use resources productively
A1 the profit motive incentivises firms to supply goods and services consumers value, encouraging efficient production and innovation
B1 together these mechanisms direct investment and entrepreneurship towards activities that promise returns, thereby shaping resource allocation
Answer: Private property secures owners control and incentives to use resources productively; the profit motive drives firms to produce goods consumers value and to innovate, directing resources where returns are expected.

Question 6

B1 advantage 1: greater efficiency and innovation from private sector involvement, as markets reward productive firms
B1 advantage 2: ability of the government to correct market failures and provide public goods, improving equity and social welfare
B1 brief development linking each advantage to resource allocation, e.g. markets allocate scarce resources via prices while government redistributes where markets fail
Answer: E.g. mixed economies combine market efficiency and innovation with government provision to correct market failures and improve equity, so resources can be allocated both efficiently and more fairly.

Question 7

B1 disadvantage 1: inefficient resource use and shortages or surpluses due to lack of price signals and inaccurate central information
B1 disadvantage 2: limited incentives for productivity and innovation, leading to low efficiency in production methods
B1 brief development linking to 'how' (production methods) and 'for whom' (political priorities may ignore consumer preferences)
Answer: E.g. command economies often misallocate resources because planners lack price information, causing shortages or surpluses, and they offer weak incentives for efficient production and innovation, reducing productive efficiency.

Question 8

B1 A = Market, because the US tech sector is dominated by private firms responding to market prices and profit signals
B1 B = Mixed, because the NHS is publicly funded and provided alongside private markets, characteristic of mixed economies
B1 C = Planned, because Cuba's agricultural sector in the 1980s was centrally planned with state ownership and directives
B1 D = Mixed, because Sweden combines robust welfare provision and public services with market-based private sectors
B1 E = Planned, because North Korea's economy is centrally controlled with extensive state ownership
Answer: A Market; B Mixed; C Planned; D Mixed; E Planned.

Question 9

M1 profit signals indicate consumer demand: higher prices and profitability for certain goods signal firms to produce more of those goods
A1 this channels resources into producing goods and services consumers value, allowing decentralised adjustment without central direction
M1 limitation: profit ignores externalities and public goods, so profitable production may harm social welfare or underprovide non-profitable but socially valuable goods
A1 example or development: e.g. pollution-producing firms may be profitable yet impose costs on others, so profit signals alone can misallocate resources
Answer: Profit signals guide firms to produce goods consumers demand, directing resources efficiently; however, profit does not account for externalities or public goods, so relying on profit alone can lead to socially undesirable outcomes.

Question 10

M1 command economies allocate output to groups according to the plan or political priorities, e.g. basic needs, strategic industries or equal provision regardless of ability to pay
A1 equity advantage: can prioritise universal provision or redistribution to achieve greater equality or guaranteed access to essentials
M1 efficiency disadvantage: central allocation can ignore consumer preferences and price signals, causing misallocation where goods consumers value less are produced instead of those they want more
A1 gives rise to shortages, surpluses and wasted resources due to imperfect information and weak incentives
Answer: Planners decide who gets output according to policy priorities, which can improve equity by guaranteeing basic needs but can reduce efficiency by ignoring consumer preferences and market signals, causing misallocation.

Question 11

M1 point 1: productive efficiency, market: competitive pressures and profit incentives encourage firms to minimise costs and innovate, improving productive efficiency
A1 planned economy: lack of competitive pressure and weak incentives often leads to lower productive efficiency and slower innovation
M1 point 2: allocative efficiency, market: prices reflect marginal benefit and marginal cost so markets can achieve allocative efficiency where consumers' preferences determine output mix
A1 planned economy: without price signals, planners may misjudge consumer demand, producing goods that do not match preferences, reducing allocative efficiency
B1 second-order nuance: markets may still fail allocatively when externalities or public goods are present, requiring government intervention
A1 short conclusion: markets tend to outperform planned systems on productive and allocative efficiency, but market failures mean planning or regulation can sometimes improve outcomes
Answer: Markets generally deliver higher productive and allocative efficiency because of price signals and competition, while planned systems often suffer from poor incentives and information; however, market failures can justify some planning or regulation.

Question 12

Level 1 (1-5): Basic or partial explanations of the differences between mixed and free market economies, limited application and little or no evaluation. Judgement, if present, is unsupported or asserted.
Level 2 (6-10): Clear analysis of how mixed and free market economies address the what/how/for whom questions, with relevant examples. Some evaluation of trade-offs between efficiency and equity, and consideration of incentives or information problems. Judgement is present but may be qualified.
Level 3 (11-15): Comprehensive analysis that integrates efficiency, equity, incentives and information constraints, including real-world examples and counterarguments. Evaluation weighs strengths and weaknesses, considers magnitude and time periods, and reaches a balanced, well-supported judgement.
Indicative content:
- Arguments that mixed economies are preferable: they combine market efficiency with government provision to correct market failures, provide public goods and redistribute income; examples such as Nordic welfare states providing high living standards while maintaining vibrant private sectors
- Arguments favouring free markets: superior incentives for innovation and efficiency, faster responsiveness to consumer preferences, lower public-sector distortion and potential for higher growth; examples of dynamic private sectors in largely market-oriented economies
- Consider information problems and practical constraints: governments face knowledge and incentive problems in central planning and risk of regulatory capture, while markets can fail due to externalities, public goods, monopoly power and unequal distribution
- Consider trade-offs and magnitude: the extent of market failure, the effectiveness and cost of government intervention, and the risk that excessive intervention undermines incentives; short-term versus long-term effects
- Distributional and political considerations: social preferences for equity, political feasibility, administrative capacity and corruption risks that affect whether mixed systems actually deliver benefits
- Possible conclusion: mixed economies are often preferable in practice because they can combine advantages of markets and state provision, but they are not always preferable in all contexts; effectiveness depends on design, institutional quality and the specific challenge being addressed

Economic Systems: Market, Mixed and Planned Economies - Worksheets, Questions and Revision