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Resource Allocation in Market and Mixed Economies


Explain the different ways in which resources are allocated in a market economy and in a mixed economy [8]


Economic Systems

[CIE AS level May 2018]

Preview Answer

Step ➊ : Define 'market economy and mixed economy' in the introduction. (Knowledge and understanding)

All societies are faced with the problem of scarcity, consequently, resources have to be allocated in the most efficient way. The free market economy and the mixed economy will allocate resources in different ways. In a free-market economy, there is no government intervention at all. All decisions are taken by individuals and firms. In a mixed economy, there is a combination of market forces and central planning

Step ➋ : Explain how resources in a market economy and a mixed economy are allocated in different ways.

➤ 2.1. In a free market, resources are allocated through the price mechanism. In contrast, the mixed economy involves both private and public sectors in the process of resource allocation.

In a free market, the price mechanism determines the production, utilization of resources, and pricing. The forces of demand and supply determine what goods and services will be produced, how they will be produced and for whom will they be produced. Prices perform a signalling function, this means that they adjust to demonstrate where resources are required, and where they are not. Shortages result in prices rising. Surpluses result in prices falling. The profit motive and enterprise have a big role to play in the free market. In order to remain competitive and maximise profit, firms will try to utilise resources in the most efficient way possible to reduce costs. An important point to note is that the government has a very restricted part to play in a market economy.

By contrast in a mixed economy, both the free market and government participation is required in the allocation of resources by combining the best of both worlds. Decisions on most important economic issues involve some form of planning (by private as well as public enterprises) and interaction between government, businesses and labour through the market mechanism. Private ownership of productive resources operates alongside public ownership in many mixed economies.

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