An economic system depicts how production, distribution and consumption of goods and services is managed in an economy. The factors of production (Land, Labour, Capital and Entrepreneurship) needed for any economic system to function are limited [CITATION Geo08 l 2057] and as a result the resources must be allocated efficiently and effectively to get the optimum benefit.

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The mixed economy is a combination of two economic approaches, the free market economy and the planned economy. Before discussing the mixed economy, the other two approaches will be briefly covered as follows:

FREE MARKET ECONOMY

In this economic system goods and services are allocated by market price without any intervention from the government [CITATION Geo08 l 2057] . Those who are willing and able to pay the market price for various goods and services get those goods and services [CITATION Geo08 l 2057] .

Adam Smith, a Scottish moral philosopher and a pioneer of political economics, was of the opinion that if everybody acts from self-interest, spurred on by the profit motive, then the economy will work more efficiently, and more productively, than it would do were economic activity directed instead by some sort of central planner [CITATION Geo08 l 2057] .

This represents the summit of capitalism. In reality, a perfectly free market economy is a myth t only exists in the wild where humans do not intervene and where it is the case of survival of the fittest [CITATION Geo08 l 2057] .

However, the free market economy often creates problems of selfish interest abandoning and abusing communal resources in society (such as the Tragedy of the commons [CITATION Geo08 l 2057] ), creating monopolies and oligopolies, and may relegate the less fortunate to persistent poverty. Capital flows to where it will get the highest return, this may engender a gap between the rich and the poor. With this in mind, Adam Smith recognised that some government action might be needed, such as to impose antitrust laws, enforce property, and to provide policing and national defence [CITATION Geo08 l 2057] .

PLANNED ECONOMY

In a planned economy, resource allocation is determined by a central authority (usually the government) rather than by demand and supply. This is normally practised in socialist countries such as North Korea and Cuba. The central authority determines the quantity of goods and services produced in the economy.

A planned economy, in theory, does not suffer from business cycles, asset bubbles Such as the tech bubble in the late 1990’s and housing bubble mid-2000 [CITATION Geo08 l 2057] .

However, a planned economy lacks the kind of flexibility that is present in a free economy, and because of this, it reacts slower to changes in consumer needs and fluctuating patterns of supply and demand.

Government businesses tend to perform poorly in comparison to private-sector counterparts. Government businesses often enjoy a legally protected monopoly, and the lack of competition means the firms face little pressure to be efficient.

Royal Mail is a good example of how the government impeded it from taking on sensible business strategies and modernising its operations. It was a legally protected monopoly till 2006 following the full liberalisation of the postal market which opened the door to newer and more efficient competitors, leading to fall in revenue.

Politicians often interfere in important management decisions, making it harder to take unpopular actions on pay, factory closures and job cuts, particularly when there are strong public-sector trade unions and a union-friendly government.

Politically imposed financial constraints may also force public-sector firms to under invest. Although privatisation has not been universally beneficial, on balance it has increased economic efficiency.