Quick questions on Economic systems and resource allocation explained: O-Level Economics

An economic system is the way a society organises the use of its scarce resources. There are three broad types:

In a market economy, decisions are made by consumers and firms acting through prices, with little government involvement. Prices act as signals: if consumers want more of a good, its price rises, profits rise, and firms move resources into producing it.

In a planned (or command) economy, the government owns most resources and decides what is produced, how, and for whom. Prices and quantities are set by planners rather than markets.

A mixed economy combines the two: private firms and consumers make most decisions through markets, but the government also intervenes to correct market failure, provide public goods and reduce inequality. Almost every real economy is mixed; they differ only in how large the government's role is.

Resources are allocated efficiently because prices follow consumer wants; the profit motive drives firms to cut costs and innovate; and consumers have wide choice.

Markets can fail: public goods are under-provided, harmful goods may be over-provided, and external costs such as pollution are ignored. Income can be very unequal, since only those who can pay receive goods.