1.1 - Free market economies, mixed economy, command economy Flashcards
Nature of economics
Free Market Economy
- In a free market economy, economic decisions are primarily made by private individuals and firms.
- All the resources are allocated by the market forces of supply and demand
Important figure for free market economy
Adam Smith, who advocated for the “invisible hand” of the market to allocate resources efficiently.
Command economy/ centrally planned economy
- In a command economy, the government or central authority makes all economic decisions.
- All the resources are allocated by the government
Important figures for command economy
- Karl Marx, who envisioned a classless society with centralised planning
- Friedrich Hayek, a critic of central planning who believed in free markets.
Mixed Economy
- In a mixed economy, both the private sector and the government play significant roles in economic decision-making.
- Mixed economies combine elements of free market and command economies.
Example of mixed economy
Example: Most modern economies, including the United States, have mixed economic systems.
Advantages of a Free Market Economy
- Efficiency: Competition incentivises firms to produce efficiently and innovate.
- Consumer Choice: consumers have a wide range of choices in products and services.
- Economic Growth:
free markets can lead to rapid economic growth and higher living standards.
Disadvantages of a Free Market Economy
- Inequality:
income and wealth disparities can be significant. - Lack of Public Goods: some essential services may be under-provided without government intervention (e.g., public healthcare).
- Boom-Bust Cycles:
free markets can be prone to economic cycles of booms and busts.
Advantages of a Command Economy
- Equality:
command economies aim to reduce income inequality through central planning. - Stability:
central control can provide stability during crises. - prioritising Social Goals: resources can be directed toward public services and social welfare.
Example of command economy
North Korea’s command economy focuses on central planning and state control.
Disadvantages of a Command Economy
- Lack of Incentives: Central planning may discourage innovation and individual initiative.
- Resource Mis-allocation: Inefficient allocation of resources can lead to shortages or surpluses.
- Bureaucracy:
Command economies often involve complex bureaucracies.
Roles of the State in a Mixed Economy
- Regulation
- Public Goods and Services
- Welfare and Redistribution
- Stabilisation and Economic Planning
Roles of the State in a Mixed Economy: Regulation
- The state regulates various aspects of the economy, such as consumer protection, environmental standards, and financial markets.
> Example: Government agencies like the Environmental Protection Agency (EPA) set standards for pollution control.
Roles of the State in a Mixed Economy: Public Goods and Services
- The government provides public goods and services that may not be adequately supplied by the private sector, including infrastructure, education, and healthcare.
> Example: Public schools and highways are funded and operated by the government.
Roles of the State in a Mixed Economy: Welfare and Redistribution
- Governments implement social safety nets and income redistribution policies to address poverty and inequality.
> Example: Welfare programs and progressive taxation aim to reduce income disparities.
Roles of the State in a Mixed Economy: Stabilisation and Economic Planning
- Governments may use fiscal and monetary policies to manage economic cycles and prevent economic crises.
> Example: Central banks adjust interest rates to control inflation and promote economic growth.
