1.1.6- Economic Systems Flashcards
What is an economic system?
A network of individuals, organisations and institutions used by a society to resolve the basic problem of what, how much, how, and for whom to produce
What is a free market economy?
When governments leave markets to their own devices, so market forces of supply and demand allocate scarce resources
What are the characteristics of a free market economy?
-private ownership of resources
-economic agents are motivated by self interest
-consumers have sovereignty; they determine what is produced by being willing and able to buy goods
-resources are allocated by the price mechanism
What are the advantages of a free market economy?
-consumer sovereignty
-freedom of choice
-profit motive
-incentive to work harder for higher wages
-firms face competitive forces driving down prices
-automatic system
What did Adam Smith believe?
There was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage
What did Adam smith believe about the state?
The state needed to provide laws, proper rights, and goods such as bridges and roads
What did Friedrich Hayek believe?
State control of the economy leads to the loss of freedom, and central planning led to what a small minority wanted being forced on the whole of society
What are the disadvantages of a free market economy?
-high levels of inequality
-may be monopolies that charge high prices
-could be overconsumption of demerit goods
-resources may be wasted on advertising and marketing
What is a command economy?
Where the government allocated all of the scarce resources in an economy to where they think there is a greater need
What are the characteristics of a command economy?
-government owns and allocates resources
-gov sets production targets and growth rates
-goods are allocated through rationing
-no private property
-workers are given jobs by the government
What are the advantages of a command economy?
-resources are allocated to maximise social welfare
-easier to coordinate resources in times of crises such as wars
-inequality could be reduced
-abuse of monopoly power could be prevented
-no unemployment
-less wastage of resources as there is no need for competition or advertising
What did Karl Marx believe?
He believed that capitalists profits came from exploiting labour, so it would push workers to revolution
What are the disadvantages of a command economy?
-danger of gov failure
-gov may not have enough info to make good decisions
-lack of choice
-lack of incentives to be innovative and to work hard
-may not meet consumer preferences
What is a mixed economy?
An economy where both the free market mechanism and the government planning process allocates resources
What are traditional economies?
Those characterised by family groups, low productivity, little specialisation, and barter trade e.g. in worlds most underdeveloped regions
