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4. Types of Economies

Types of economies. How many different types of economies are the and how are resources allocated? This article will define what free market, mixed and command economies are and explain the advantages and disadvantages of each one.

 TYPES OF ECONOMIES, economy, free market, command, mixed economy

Welcome to Simply Economics. This article is the fourth in a series to explain economics to those who want to broaden their scope of the subject. Click here to find out more about the series.

TYPES OF ECONOMIES

There are 3 main types of economy:

TYPES OF ECONOMIES, economy, free market, command, mixed economy

The majority of economies are mixed economies but the extent to which they are, is varied.

FREE MARKET ECONOMY

A free market economy is an economy where all the resources are allocated by the price mechanism. This means the decision of what and for who to produce goods for is left to the price mechanism. Generally, in a free market, economic decisions are not made by the government or an active group. Instead, economic decision making is in the hands of individual consumers and producers.

There are no 100% free-market economies in the world today because, in every country, there is government intervention. However, in developing countries such as Thailand, government intervention is very minimal hence they may reflect what a free market economy looks like.

ADVANTAGES OF A FREE MARKET ECONOMY:

  • There will be an increase in efficiency and lower prices. This is because there is a lot of competition in a free market economy.
  • There are more financial incentives. This because entrepreneurs have more incentive to invest and take risks.

DISADVANTAGES OF A FREE MARKET ECONOMY:

  • Monopolies may form. This is because of high competition which may lead to rival firms going out of business or getting taken over.
  • There will be big swings in the business cycle. This is because there is no government intervention to protect the economy for recessions and unsustainable periods of economic growth.

command economy

A command or centrally planned economy is an economy where the government allocates all resources and there is no use of the price mechanism. This means the decisions of what and who to produce goods for is controlled by the government.

A command economy is good for when a country is in a national crisis as they work effectively. However, the standard of living tends to fall when a command economy is as adopted. An example of a command economy today is North Korea.

ADVANTAGES OF A COMMAND ECONOMY:

  • There are high levels of output. This is because there is co-operation between firms rather than competition. Firms aim to maximise output rather than profit.
  • There is a reduction in inequality. This is because the government controls all workers’ wages.

DISADVANTAGES OF A COMMAND ECONOMY:

  • There may be shortages of goods. This is because the price mechanism is unable to operate which leads to an inefficient allocation of resources.
  • There is slow economic growth. In command economies, there is usually little economic growth.

MIXED ECONOMY

In a mixed economy there are 2 sectors: private and public. Decisions on what and for who to produce goods for are made by both the public and private sectors.

Most developed countries today fall under this category.

A mixed economy has the advantages of the free market and command economies while avoiding their disadvantages. This is because governments intervene in markets when there is a failure. An example of this is government expenditure on education and healthcare.

In conclusion, there are 3 main types of economies: free market, mixed and command. Most developed countries are mixed economies, there are very few command economies and no free market economies.

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