Resource Allocation in Mixed Economies (Edexcel IGCSE Economics)

What is an Economic System?

Spec point — 1.1.5d

• In order to solve the basic economic problem of scarcity, economic systems emerge or are created by different economic agents within the economy

  • Economic agents include consumers, producers, the government, and special interest groups (e.g. environmental pressure groups or trade unions)
  • Any economic system aims to allocate the scarce factors of production

• The three main economic systems are a free market system, a mixed economy, and a planned economy

  • In a mixed economic system, the level of government intervention varies

• Ultimately, the economic system is determined by how an economy answers the three fundamental economic questions

  • What to produce?
  • How to produce it?
  • And who to produce it for?

The Three Fundamental Economic Questions

Spec point — 1.1.5d

Diagram: Three Fundamental Economic Questions

How these three questions are answered determines the economic system of a country

Explaining the Three Questions

What to produce?

• As resources are limited in supply, decisions carry an opportunity cost. Which goods/services should be produced, e.g. better rail services or more public hospitals?

How to produce it?

• Would it be better for the economy to have labour-intensive production so that more people are employed, or should goods/services be produced using capital-intensive production (machinery)?

Who to produce it for?

• Should goods/services only be made available to those who can afford them, or should they be freely available to all?

The Three Economic Questions in Different Economic Systems

If the economy is mostly based on a free market system it has more private ownership

• The main aim is to profit maximise and tend to minimise resource waste by allocating resources according to supply and demand forces

• If the economy is mostly based on planned system, it has more public ownership

  • It prioritises the public's best interests, is more effective in providing goods and services such as education and healthcare, which may not be adequately supplied by private firms

Exam Hint You may be asked to assess how effective public or private sector ownership is in solving the economic problem of scarcity. Make sure to think critically and consider how well the public or private sector provide goods / services in terms of what they produce, how they produce them, and for whom they produce them.

If the economy is mostly based on a free market system, it has more private ownership. They may provide goods and services more efficiently, as their main aim is to profit maximise. To achieve this, they minimise costs and resource waste by allocating resources according to the forces of demand and supply (the price mechanism)

However, if the economy is mostly based on planned system, it has more public ownership and prioritises the public's best interests. It is more effective in providing goods and services such as education and healthcare, which may not be adequately supplied by private firms