1.1.6 free market economics, mixed economy and command economy Flashcards
free market economy (def.)
an economy that has no government intervention in the allocation of resources to the distribution of goods/services
which economist believe in free market economies and what did he say?
adam smith
there was an “invisible hand” in the market which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people
he believed competition in the market caused lower prices as firms wanted to be competitive so this benefits the consumer as they can get goods cheaply
however, he rogued that the state needed to provide goods/services which free markets wouldn’t, such as road, bridges, laws, property rights
free market economies adv.
system is automatic due to invisible hand - resources are moved our of production when people stop wanting it or costs are too high
consumers have freedom of choice
high motivation - people know hard work = high rewards
political freedom
productive efficiency - firms are producing goods at the lowest cost they can
free market dis.
higher levels of inequality - the rich own more CELL so can grow richer
lack of merit goods and little control of demerit goods
if competition disappears, there may be monopolies who charge higher prices and offer low quality goods/services
command economy (def.)
an economy in which all the resources are owned by the state and the government controls the distribution of goods/services
which economist believed in command economies and what did he say?
karl marx
he criticised capitalism : believed that capitalist’s profits came from exploiting labour as they underpaid workers
he wanted to remove the difference between the incomes of workers and owners and believed that capitalism would collapse leading to communism
command economies adv.
state provides a minimum standard of living
less wastage of resources
long-term planning means the industry doesn’t have to keep changing and shifting resources
standardised products means that they are produced cost effectively
merit goods are encouraged and increased whilst demerit goods aren’t produced
command economies dis.
impossible for the state to make so many decisions correctly - which may lead to over or under supply and a waste of resources
decision making will be slow - there could be a increase in bribery and corruption
less motivation and efficiency as everyone receives the same wage
consumers lose their freedom
mixed economy (def.)
a blend of the free market and planned economy as individuals, firms and government own factors of production (CELL) and distribute goods/services
what is the government’s role in a mixed economy?
create a framework of rules
supplement and modify the price system
redistribute incomes
stabilise the economy
