Interventionism: The Mixed Economy

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Economics is greatly impacted by how well information travels through society. Today, social media giants Twitter, Facebook, and Instagram are major forces on the information super highway. (Credit: Johan Larsson/Flickr)

Decisions ... decisions in the social media age

To post or not to post? Every day we are faced with a myriad of decisions, from what to have for breakfast, to which route to take to class, to the more complex—“Should I double major and add possibly another semester of study to my education?” Our response to these choices depends on the information we have available at any given moment; information economists call “imperfect” because we rarely have all the data we need to make perfect decisions. Despite the lack of perfect information, we still make hundreds of decisions a day.

And now, we have another avenue in which to gather information—social media. Outlets like Facebook and Twitter are altering the process by which we make choices, how we spend our time, which movies we see, which products we buy, and more. How many of you chose a university without checking out its Facebook page or Twitter stream first for information and feedback?

As you will see in this course, what happens in economics is affected by how well and how fast information is disseminated through a society, such as how quickly information travels through Facebook. “Economists love nothing better than when deep and liquid markets operate under conditions of perfect information,” says Jessica Irvine, National Economics Editor for News Corp Australia.

This leads us to the topic of this chapter, an introduction to the world of making decisions, processing information, and understanding behavior in markets —the world of economics. Each chapter in this book will start with a discussion about current (or sometimes past) events and revisit it at chapter’s end—to “bring home” the concepts in play.


In this chapter, you will learn about:

  • What Is Economics, and Why Is It Important?
  • Microeconomics and Macroeconomics
  • How Economists Use Theories and Models to Understand Economic Issues
  • How Economies Can Be Organized: An Overview of Economic Systems

What is economics and why should you spend your time learning it? After all, there are other disciplines you could be studying, and other ways you could be spending your time. As the Bring it Home feature just mentioned, making choices is at the heart of what economists study, and your decision to take this course is as much as economic decision as anything else.

Economics is probably not what you think. It is not primarily about money or finance. It is not primarily about business. It is not mathematics. What is it then? It is both a subject area and a way of viewing the world.

Part 4 of Lessons for the Young Economist

Lesson 17: Price Controls

Lesson 18: Sales and Income Taxes

Lesson 19: Tariffs and Quotas

Lesson 21: Inflation

Lesson 22: Government Debt

Lesson 23: The Business Cycle

Test PDF eBook: 
Interventionism: The Mixed Economy
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49 Pages
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Educational Materials

Sample Questions from the Interventionism: The Mixed Economy Test

Question: Explain how the poorest and most desperate are actually hurt by minimum wage laws.


Immigrants and low-skilled workers can only compete by offering to do jobs at lower wages than native and high-skilled workers. Minimum wage laws make it illegal for them to undercut their rivals too much. Minimum wage laws effectively take away the one option that the poor and desperate have, to ensure that they can get a job. Sample Partial Credit Answer High-skilled workers can get hired above the minimum wage, so it doesn't directly affect their working conditions.

Question: Explain how interventionists vie for "the best of both worlds."


The interventionists want to retain a market economy with private property, but have the government selectively "intervene" in order to correct certain features they dislike. Thus, the interventionists claim they are avoiding the excesses of pure capitalism and the horrors of pure socialism. Sample Partial Credit Answer The interventionists want a mixed system that is better than capitalism and socialism.

Question: *How can minimum wage laws reduce the long-run demand (not just short-run quantity demanded) for labor?


Business owners may respond to a minimum wage law by buying more machines and redesigning their workplaces to operate with a fewer number of higher-skilled employees. Once businesses have adapted in this fashion, the demand curve for labor will have shifted to the left, because even at the original wage level, businesses would now demand a lower quantity.

Question: How can the quantity supplied of apartments fall, even in the short run? Isn't there a fixed number of apartment units at any given time?


Remember that the quantity supplied means the number of apartment units offered for rent. As the legally permissible price falls, more and more owners won't find it worthwhile to go through the hassle and risk of renting their physically available rooms to total strangers.

Question: Why would someone support a price ceiling?


Someone might support a price ceiling, thinking that this will help keep certain things affordable. For example, someone might support a price ceiling on apartments or baby food, so that poor people can access shelter and feed their infants. Sample Partial Credit Answer To help the poor.

Question: Explain how minimum wage laws might lead to a decline in workplace quality.


Employers attract workers through a combination of job features including salary (or wage), health benefits, length of lunch breaks, temperature of the workplace, etc. If minimum wage laws force an employer to offer higher monetary compensation than he otherwise would have, he might cut back on some of the other desirable features of the job to recoup the money. Sample Partial Credit Answer The employer might pay the higher wages by cutting back elsewhere, such as air conditioning.

Question: How might price ceilings on gasoline impede the evacuation of a city in the path of an oncoming hurricane?


At any given time, gasoline stations in a typical city don't have enough fuel in the underground tanks to withstand a mass exodus of the entire population, with every motorist filling up before leaving town. If the authorities impose price ceilings to prevent "gouging" after the news breaks, the stations will run out of gas before everyone has had a chance to refuel. Consequently some motorists will be stranded on the interstates, impeding traffic flow.

Question: The textbook claims that price ceilings (a) cause immediate shortages and (b) lower long-run supply. What's the difference? Use a specific example to illustrate.


A price ceiling pushes down the price from its equilibrium level, moving along the original supply curve to a lower quantity supplied (and a higher quantity demanded). This is the immediate shortage, for example a million people might try to find apartments but only 800,000 are offered on the market. In the long run, investors don't build as many new apartment buildings because of the price ceiling, so that the whole supply curve of apartments shifts to the left, or at least doesn't shift to the right as much as it otherwise would have. Sample Partial Credit Answer A price ceiling pushes us along the original supply curve in the short run, and moves the supply curve in the long run.

Question: How can a minimum wage actually hurt even the workers who stay on the job?


Employers could reduce workplace amenities and other perks to compensate for the higher labor expenses. It is possible that employees would actually prefer the original combination of pay and other benefits to the combination they receive after the imposition of the minimum wage

Question: Explain why minimum wage laws lead to higher unemployment rates.


Minimum wage laws are set above the market-clearing level, meaning that the quantity of labor supplied by workers is higher than the quantity demanded by employers. This means some workers can't get hired, even though they want to work at prevailing wage rates. This is the typical definition of unemployment. Sample Partial Credit Answer Minimum wage laws make some workers too expensive to hire.

Question: What is "mixed" in the term mixed economy?


A mixed economy combines features of both capitalism and socialism, namely private ownership and government direction.

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Source:  Dr. Robert P. Murphy, Lessons for the Young Economist. (Mises Institute), (Accessed 04 April, 2014). License: Creative Commons BY
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