Cambridge International as and a level Economics Ebook

Figure 1.3 
The market economy
Government
Firms
Price
mechanism
Households
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Cambridge International AS Level Economics

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for all enterprise to be state-owned – there has to be a 
limited opportunity for the private ownership of small 
businesses such as shops, restaurants and personal services 
like hairdressing and cleaning. For more substantive 
businesses, ownership is oft en on a shared basis between 
the state and the private sector. Th
is oft en involves foreign 
investors who are keen to exploit the opportunities of an 
emerging market economy.
Queuing for bread
Th
e outcome of the planned economy is that central 
planning tends to set goals for the economy that diff er 
from those of the market economy. In particular they have 
a clear objective of achieving as high a rate of economic 
growth as possible in order to ‘catch up’ on the progress 
being made by much more advanced market economies. 
Th
e planned economy is more correctly described as one 
of sacrifi cing current consumption and standards of living 
in order to achieve enhanced future well-being. Th
is is the 
sacrifi ce that has to be made by the present generation for 
the benefi t of future generations.
It is increasingly diffi
cult to provide examples of 
truly planned economies. Th
e most obvious cases are 
North Korea, Venezuela, Cuba and Eritrea. Until recently, 
Albania would have been prominent on such a list; 
however, the market is now having much more of an 
infl uence on the economy as the country prepares for 
entry to the European Union.
The mixed economy
It is clear from the brief analysis of market and planned 
economies that, in the ‘pure’ sense, these types of 
economic systems occur in theory and not in reality. 
In contrast, the mixed economy is undoubtedly the 
characteristic form of economic organisation within the 
global economy. As its name indicates, it involves both 
private and public sectors in the process of resource 
allocation. Consequently, 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, although, increasingly, the trend is towards the 
privatisation of certain activities that were once in public 
sector hands.
Th
e best example of this is undoubtedly the UK 
economy in the mid-1970s when the public and private 
sectors were of broadly equal importance. At this time the 
government was responsible for:
■
substantial areas of public expenditure such as health care, 
social services, education and defence
■
the direct operation of nationalised industries, such as 
coal, iron and steel, railways, gas, water, telephones and 
electricity
■
providing support for large areas of manufacturing, such 
as vehicle production, aerospace and electronics, in