Mixed economy

Command and market economies both have significant faults. Partly because of this, an intermediate system has developed, known as mixed economies.

A mixed economy means very much what it says as it contains elements of both market and planned economies. At one extreme we have a command economy, which does not allow individuals to make economic decisions, at the other extreme we have a free market, where individuals exercise considerable economic freedom of choice without any government restrictions. Between these two extremes lies a mixed economy. In mixed economies some resources are controlled by the government whilst others are used in response to the demands of consumers.

Technically, all the economies of the world are mixed: it is just the balance elements between market and planned elements that alters.

The aim of mixed economies is to avoid the disadvantages of both systems. So, in a mixed economy the government and the private sector interact in solving economic problems.

The UK is a mixed economy: some services are provided by the state (for example, health care and defence) whilst a range of privately owned businesses offer other goods and services. The Conservative government under Margaret Thatcher switched many businesses from being state-owned and controlled to privately owned as part of its privatization programme. This has the UK economy further away from the planned system.

Demand and supply

Demand refers to the quantity of a good the potential purchasers would buy, or attempt to buy, if the price of the good were at a certain level.

The total quantity demanded is referred to as the market demand. The following factors influence the total market demand for a good:

• the price of a good. Demand is higher at lower prices;

• the size of household income – i.e. how much money consumers have to spend. In some cases, the cost and availability of credit, e.g. with spending on credit cards;

• tastes, fashions, attitudes towards a good;

• consumer expectations about future market conditions (e.g. expected price rises or supply shortages);

• the distribution of income among the population – i.e. how wealth is spread among the population. For example, is there a large number of very poor people living at a subsistence level?

Supply refers to the quantity of a good that suppliers or would be suppliers would want to produce for the market at a given price. The quantity of a good that can be supplied to a market varies up or down, either because existing suppliers increase or reduce their output quantities, or firms stop producing altogether and leave the market, varies up or down, either because existing suppliers increase or reduce their output quantities, or firms stop producing altogether and leave the market, or new firms enter the market and begin producing goods.

If the quantity that firms want to produce at a given price exceeds the quantity that purchasers would demand, there would be an excess of supply.

The quantity of a supplied good depends on:

• the price obtainable for the good. Firms will want to supply more at higher prices;

• changes in technology. Technological developments which reduce costs of production (and increase productivity) will raise the quantity of supply of a good;

• changes in the weather may affect the availability of supply (e.g. agricultural goods).