Compare market, planned and mixed economic systems and how each answers the three basic economic questions.

What this dot point is asking

You must compare how market, planned and mixed economic systems answer the three basic economic questions, and weigh the strengths and weaknesses of each.

The three questions every system must answer

Because resources are scarce, every economy must decide:

1. What to produce.
2. How to produce it.
3. For whom to produce it.

The difference between systems lies in who makes these decisions and how.

The market (free-enterprise) economy

In a pure market economy, decisions are made by private individuals and firms interacting through markets. There is no central planner. The price mechanism coordinates everything: prices act as signals and incentives that guide resources to where they are most valued.

• What is decided by consumer demand. Goods consumers will pay for get produced.
• How is decided by firms seeking the lowest-cost methods to maximise profit.
• For whom is decided by income and the ability to pay.

Strengths include efficiency, choice, innovation and responsiveness to consumers. Weaknesses include market failures: inequality, under-provision of public goods, externalities such as pollution, and instability.

The planned (command) economy

In a planned economy, the government owns most resources and makes the central decisions. A central authority sets production targets, allocates resources and often fixes prices and wages.

• What, how and for whom are all decided by government planners rather than markets.

Strengths can include reduced inequality, provision of essential services to all, and the ability to direct resources to national priorities. Weaknesses are significant: planners lack the information that prices provide, so shortages and surpluses are common; there is little incentive to innovate or work efficiently; and consumer choice is limited.

The mixed economy

In practice, no economy is purely market or purely planned. A mixed economy blends both. The private sector and price mechanism handle most production and consumption, while the government:

• provides public goods (defence, street lighting) that markets under-supply;
• regulates to correct externalities and protect consumers;
• redistributes income through taxes and welfare;
• manages the macroeconomy with fiscal and monetary policy.

Comparing the systems

The core trade-off is between efficiency (markets excel here) and equity and stability (government intervention can improve these). Mixed economies attempt to capture the efficiency of markets while using government to address inequality, market failure and instability.