1.1.6 Economic systems Flashcards
What is a free market economy
where resources are allocated by the interaction of demand and supply with no interference from the government.
Who are free markets associated with
Adam Smith
what do free markets produce
Consumer sovereignty and the profit motive.
How do free markets produce
Competition between private firms.
who do free markets produce for
The rationing function of the price mechanism. - those who are willing/ can afford to pay
What is a capitalist market based on
Private ownership of property
Competitive markets
Private ownership of capital
Free enterprise
The pursuit of private profit
Little or no role for the state (government)
Little or no taxation
What is a command economy
where resource allocation decisions are taken centrally by the state and there is no market activity.
WHat do command economies decide to produce
The government decides what is best for its citizens.
Who do command economies produce for
Equal distribution to all with goods allocated on the basis of need rather than ability to pay.
How do command economies produce
State owned monopolies, carrying out the government’s production plan.
What is a mixed economy
where resources are directed by a mixture of free market price signals and by the government.
Advantages of a free market economy
Economic freedom -
Strong economic incentives
Price signals
Disadvantages of a free market economy
Inequality and inequity
Free markets can fail to create socially optimal outcomes:
Advantages of a command economy
Full employment
Fairness
Social welfare
Disadvantages of a command economy
Allocative inefficiency
Dampened incentives
Corruption
