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Economic Systems and Production Possibility Curves: Question 4

Syllabus 1.4

Multiple choice AS 1 mark

In Country Novaria, the government owns almost all of the land, factories and firms. A central planning committee decides in advance what quantities of steel, wheat and clothing will be produced each year, which factories will produce them, and how the output will be shared out among consumers. Prices are set by the government rather than being determined by the interaction of buyers and sellers, and production decisions are not driven by a profit motive.

Which of the following best describes a key characteristic of the type of economic system operating in Country Novaria?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the key characteristics of market, planned and mixed economies

  • Market (free-market) economy: resources (land, labour, capital) are mainly privately owned; the price mechanism, driven by consumer demand and producer supply, allocates resources; firms are motivated by profit and are free to enter or leave any market; consumers direct output through their spending (consumer sovereignty).
  • Planned (command) economy: the state owns most of the factors of production; a central planning authority, not market prices, decides what is produced, how it is produced, and for whom it is produced; there is no free price mechanism guiding these decisions, and production is not driven by a profit motive.
  • Mixed economy: private and state-owned enterprises exist alongside each other; the government intervenes directly in some markets (for example, providing public goods or correcting market failure) while other markets are left largely to the price mechanism.

Step 2: Match the scenario to a system

In Country Novaria, the government owns almost all the land, factories and firms, a central planning committee decides output levels and distribution in advance, and prices are set by the government rather than emerging from buyer–seller interaction, with no profit motive involved. This combination, state ownership plus central decision-making replacing the price mechanism, is the defining characteristic of a planned (command) economy, matching option B.

Why the other options are wrong

  • A (free price mechanism): this describes how a market economy allocates resources; it is the opposite of Novaria, where the government, not buyers and sellers, sets prices and decides output.
  • C (firms compete for profit, free entry/exit): this describes market-economy behaviour; Novaria’s factories are directed by central planners rather than competing independently for consumer spending or profit.
  • D (private and state enterprises side by side, government intervening only in some markets): this describes a mixed economy; Novaria’s government controls ownership, output and distribution throughout the whole economy, not just in some markets alongside a private sector.

Final answer

  • Country Novaria is operating a planned (command) economy, since the state owns the factors of production and central planners, not the price mechanism, decide what, how and for whom to produce, option B.