1.1.6 Free market, mixed and command economies Quiz: Pearson Edexcel Economics A, Unit 1

The 20 questions

1. What defines a free market economy?

   • Government owns and operates most of the major industries to control prices and output.
   • All goods are provided free of charge by the state to ensure equal access for every citizen.
   • Resources are allocated by a central authority that sets the output of every industry in advance.
   • Resources are allocated mainly through the price mechanism, with little direct government involvement in decisions.

2. What defines a command economy?

   • The state makes most decisions about what to produce, how to produce it and for whom.
   • Prices are set entirely by the price mechanism, with the state providing only a legal framework.
   • Consumers decide output by voting in elections, so no market prices are used in the economy.
   • Private firms decide output and prices, while the state intervenes only to correct market failures.

3. What defines a mixed economy?

   • Resources are allocated only by markets, with the state having no role in any sector at all.
   • Resources are allocated by barter, so no money or prices are used in exchange anywhere.
   • Resources are allocated only by the state, with some limited private ownership of small firms.
   • Resources are allocated through both markets and the state, with the private sector and government sharing roles.

4. Which economist is associated with the idea that the price mechanism coordinates economic activity through an 'invisible hand'?

   • Karl Marx.
   • John Maynard Keynes.
   • Adam Smith.
   • Thomas Malthus.

5. Which economist argued that the price system transmits dispersed knowledge that central planners cannot access?

   • Friedrich Hayek.
   • Karl Marx, who argued that the state should plan production directly in a classless society.
   • Adam Smith, who argued that governments should set the prices of basic goods in society.
   • David Ricardo, who argued that land rents should be taxed heavily to fund state planning.

6. Which economist's analysis of capitalism emphasised class conflict and the exploitation of labour?

   • Friedrich Hayek.
   • Adam Smith.
   • Karl Marx.
   • Milton Friedman.

7. Which is an advantage of a free market economy?

   • Prices signal scarcity and encourage efficient allocation of resources in response to consumer demand.
   • Output is planned to match the needs of every citizen, so no waste ever occurs in the economy.
   • Firms have no incentive to innovate, so resources are not wasted on competing product development.
   • Prices are fixed by the state, which guarantees stable and low prices for all goods in every market.

8. In a free market, the price of a good rises sharply after a poor harvest. What does this price rise do?

   • It signals scarcity, rationing buyers and encouraging suppliers to increase supply where possible.
   • It removes the need for consumers to make any decisions about how much of the good to buy.
   • It forces the government to set a maximum price to protect consumers from all price rises.
   • It shows that the market has failed, so the state must take over production of the good.

9. Which best describes a disadvantage of a command economy?

   • Income inequality is much higher than in free markets, because the state gives no welfare support.
   • Prices are too flexible, so consumers face large and unpredictable price changes each day.
   • Firms compete too intensely, so output is spread across too many small producers in each industry.
   • Central planners may lack the information needed to match output to consumer wants, leading to shortages or surpluses.

10. A government owns the railways and sets fares, while private firms run the taxi industry with prices set by competition. Which system best describes the economy?

    • A command economy, since the state controls at least one major industry in the economy.
    • A mixed economy, with state and private sectors allocating resources in different markets.
    • A free market economy, since the state is involved in one industry but private firms run the other.
    • A barter economy, since fares and prices are not paid in money in either industry.

11. Which is an advantage of a mixed economy?

    • It removes all government involvement, so the price mechanism operates without any interference at all.
    • It can combine the efficiency of markets with state provision of goods like defence and healthcare where markets may fail.
    • It allows the state to control every price and output level in order to eliminate scarcity completely.
    • It avoids all market failure because the state and the market never interact in the economy.

12. A country moves from a command economy to a free market. Which change is most likely?

    • Prices are more likely to be set by supply and demand, and firms are more likely to respond to consumer signals.
    • Consumers will be given vouchers to buy goods at fixed prices set by central planners in advance.
    • The state will set output targets for each industry, so that shortages are eliminated completely.
    • Private ownership of firms will be banned, so all industries will be run by the state directly.

13. Which feature of a free market is most closely linked to Adam Smith's idea of the 'invisible hand'?

    • Trade is banned to protect domestic producers from competition from overseas firms.
    • Central planners set the prices of goods so that all citizens receive equal shares of output.
    • The state directs workers to jobs so that labour is allocated to the most important industries.
    • Self-interested individuals pursuing their own gain can promote the wider good through market exchange.

14. Karl Marx criticised capitalism. Which of these is a central element of his critique?

    • Workers are exploited because they produce surplus value that is appropriated by capitalist owners.
    • Workers are paid too much, which reduces the profits of firms and discourages investment.
    • Markets are too competitive, which causes firms to produce identical goods that consumers dislike.
    • Prices are set by consumers, which gives too much power to the state in economic affairs.

15. Friedrich Hayek argued against central planning. Which reason did he give?

    • Central planners would eliminate all inequality, which Hayek regarded as the primary aim of economic policy.
    • Markets always fail to allocate goods, so the state must take over all production in the economy.
    • Central planners always produce goods at lower cost than private firms in every market situation.
    • Central planners cannot access the dispersed knowledge held by individuals, which prices communicate in a market.

16. Evaluate: is a free market economy always more efficient than a mixed economy?

    • Yes, because free markets always allocate resources perfectly, so no state involvement can improve efficiency.
    • Not always, since markets can fail through externalities, public goods and information gaps, so intervention may help in some cases.
    • No, because mixed economies always produce more goods than free markets, so they are always more efficient.
    • Yes, because the state has no information advantage, so it can never improve on market outcomes.

17. Compare the main weakness of command and free market economies in terms of resource allocation.

    • Free markets are weakened by excessive planning, while command economies rely on competition to allocate scarce resources.
    • Command economies may misallocate resources without price signals; free markets may underprovide public goods and ignore inequality.
    • Both systems rely on barter, so neither can allocate resources efficiently without money or prices in the economy.
    • Command economies allocate resources efficiently, while free markets always produce shortages of all goods in the economy.

18. A government argues that its command economy avoids unemployment and wastes no resources. Which evaluation is most accurate?

    • The claim is correct, because command economies always produce exactly what consumers want at the right price.
    • The claim is irrelevant, because economic systems cannot affect resource use or unemployment in any way.
    • Planning may cut some waste but can create shortages, surpluses and weak incentives, so the claim needs testing against outcomes.
    • The claim is false, because command economies always have high unemployment, which makes them inefficient in every case.

19. Why might a mixed economy be regarded as a compromise between free market and command economies?

    • It removes both private incentives and government involvement, so prices are set by consumers alone.
    • It uses only command planning for all goods, with prices set by the state for every good sold.
    • It uses prices and private incentives for most goods, while the state provides or regulates goods where markets are judged to fail.
    • It allocates resources only through barter, so money plays no part in exchange in either sector.

20. Which claim about the role of the state in a mixed economy is most defensible?

    • The state's role depends on judgement about the scope of market failure and the risk of government failure, which varies by country.
    • The state's role is fixed by the price mechanism, so governments have no discretion over economic policy at all.
    • The state should play no role at all, since markets always allocate resources efficiently without any intervention.
    • The state should own all industries, since markets always fail to deliver any socially desirable outcome at all.

Related quizzes

• Economics as a social science Quiz · 1.1.1 · 20 questions
• Positive and normative economic statements Quiz · 1.1.2 · 20 questions
• The economic problem Quiz · 1.1.3 · 20 questions
• Production possibility frontiers Quiz · 1.1.4 · 20 questions
• Specialisation and the division of labour Quiz · 1.1.5 · 20 questions
• Rational decision making Quiz · 1.2.1 · 20 questions
• Demand Quiz · 1.2.2 · 20 questions
• Price, income and cross elasticities of demand Quiz · 1.2.3 · 20 questions
• Supply Quiz · 1.2.4 · 20 questions
• Elasticity of supply Quiz · 1.2.5 · 20 questions