1.1.6 Free market economies, mixed economy and command economy Flashcards

1
Q

What type of economy is the UK?

A

A mixed economy since some decisions, such as healthcare and education, are made by the government whilst other decisions, such as businesses are made by the markets.

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2
Q

What is a command economy?

A

An economy in which resources are allocated by the government.
- Sometimes known as a planned economy.

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3
Q

What is a free market economy?

A

An economy in which resources are allocated by the free market.

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4
Q

Examples of command economies

A
  • Cuba
  • Laos
  • Vietnam
  • China
  • North Korea
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5
Q

Examples of free market economies

A
  • USA
  • Singapore
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6
Q

Examples of mixed economies

A
  • UK
  • France
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7
Q

Advantages of free market economies

A
  • Efficiency
  • Entrepreneurship
  • Choice
  • Competition
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8
Q

Disadvantages of free market economies

A
  • Inequality
  • Non-profitable goods would not be made
  • Monopoloies
  • Lack of welfare state
  • Volatile economy
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9
Q

Advantages of command economies

A
  • Maximised welfare
  • Low unemployment
  • Prevention of monopolies
  • Improved equality
  • Provision of social goods
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10
Q

Disadvantages of command economies

A
  • Poor decision-making
  • Restricted choice
  • Lack of risk-taking and efficiency
  • Possible corruption
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11
Q

What might happen to public services in a free market economy?

A

The role of a private company is to make money. Public services are not profitable so in a completely free market economy, private companies would not provide unprofitable services or goods.

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12
Q

What are markets?

A

Markets are a way of allocating resources.

  • Each buyer or seller in a market chooses to exchange something they have for something they’d prefer to have instead.
  • For example, someone’s labour (their work) is a resource. If they have a job, they exchange their labour for a salary.
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13
Q

What are mixed economies?

A

An economy where resources are allocated by the government and the market.

  • In a mixed economy, the government is known as the public sector and businesses that are privately owned make up the private sector.
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14
Q

Market failure

A

Where the allocation of resources by the free markets result in undesirable outcomes – e.g. traffic congestion is seen as a market failure.

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15
Q

What could governments do to address market failure?

A

Governments often intervene when there is market failure. Examples of ways they could do that:
- Incentive act by changing the law or offering tax breaks, influencing people’s behaviour.
- Governments can also intervene by providing goods or services.

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16
Q

Who are the three ket economic thinkers included in the specification?

A
  • Adam Smith
  • Karl Marx
  • Friedrich Hayek
17
Q

Who was Adam Smith?

A

Smith’s ideas have shaped traditional economic theory. He was a big advocate of free market economics and described how its “invisible hand” would allocate resources in society’s best interests.

He believed that in the free market, consumers’ demand and producers’ supply will lead to price levels being set at a point which benefits them both. - Consumers are motivated to maximise their own beliefs and producers are motivated to maximise profit.

Smith pointed out that in order for the free market to work property, there couldn’t be any monopolies and there would have to be low barriers to entry to maximise competition.

Smith also wrote about specialisation and division of labour.

18
Q

Who was Karl Marx?

A

Marx was critical of the free market and argued that it created a situation where a small ruling class of producers (the bourgeoisie) dominated and exploited the larger working class of wage earners (the proletariat).

Marx argued that profit-maximising bourgeois producers would exploit workers (e.g. paying them low wages and giving them few rights) until the proletariat eventually rose up in a revolution and took over. This would then lead to the workers controlling production and everyone having a share in the ownership of resources.

Marx’s ideas led to the rise of communism is the 20th century. Many communist countries collapsed in the late 20th century, which led to discrediting of communism and command economies, but Marx’s ideas are becoming more popular now.

19
Q

Who was Friedrich Hayek?

A

Hayek was a keen supporter of the free market system and a critic of command economies. He argued that governments should not intervene with the free market to allocate resources because governments lack the information required to allocate them in the way that is most beneficial to society.

Hayek believed that individual consumers and producers have the best knowledge of what they want or need, and so the allocation of resources should be left to them and the price mechanism.

Hayek saw the price mechanism as a way for producers and consumers to communicate. The price level set by the forces of supply and demand would show what both consumers and producers want and will naturally allocate resources in a much more efficient way than governments can.