In a pure market economy, all these decisions are made by buyers and
sellers acting through unhindered markets. The government provides the
background of defining property rights and protecting citizens against
foreign and domestic enemies but, beyond that, markets determine all
resource allocation and income distribution.
Mixed Economies
Economies that are fully traditional or fully centrally planned or wholly
free-market are pure types that are useful for studying basic principles.
When we look in detail at any actual economy, however, we discover that
its economic behaviour is the result of some mixture of central control
and market determination, with a certain amount of traditional behaviour
as well.
In practice, every economy is a mixed economy in the sense that it combines significant
elements of all three systems in determining economic behaviour.Furthermore, within any economy, the degree of the mix varies from
sector to sector. For example, in some planned economies, the command
principle was used more often to determine behaviour in heavy-goods
industries, such as steel, than in agriculture. Farmers were often given
substantial freedom to produce and sell what they wanted in response to
varying market prices.
When economists speak of a particular economy as being centrally
planned, we mean only that the degree of the mix is weighted heavily