1.1.6 Free market economies, mixed economy and command economy Flashcards
What is a free market economy?
A free-market economy is an economy that has no government intervention in the allocation of resources or the distribution of goods/services.
What is a command economy?
A command economy is an economy in which all of the resources are owned by the state and the government controls the distribution of goods/service.
What is a mixed economy?
A mixed economy is a blend of the free market and planned economy as individuals, firms and the government own factors of production and distribute goods/services.
With person was related to free market economies?
Adam Smith.
With person was related to command market economies?
Friedrich Hayek.
With person was related to mixed market economies?
Karl Max.
What did Adam Smith believe?
Adam Smith advocated for free markets with low levels of government intervention, he believed economies function best when private individuals work in their own self-interest .
What did Friedrich Hayek believe?
Friedrich Hayek believed that that command economies were flawed, he identified information gaps between what the economies actually required and what the central planners in command economies were saying it required. Which led to shortages in goods/services.
What did Karl Max believe?
Karl Marx believed that free markets lead to capitalism, in which the owners of the factors of production (Capitalists) exploited the workers, which created inequality. This required the abolition of private property.
Advantages of Free markets?
/Profit incentive motivates people to work or develop entrepreneurial ideas
/Greater variety of goods/services
/Competition leads to better quality of goods/services
/Profits, income and wealth are unlimited resulting in better standards of living
Disadvantages of Free markets?
/This increases inequality such that the gap between the rich and the poor continues to grow
/Sometimes product quality falls as firms lower quality standards in order to increase profits
/Workers get exploited
/Resource depletion and environmental degradation are often ignored
Advantages of Command economies?
/Social equality is the goal of the system as opposed to profit maximisation, so there is less inequality
/All workers receive the same wage irrespective of role or career. This helps create social equality
/Less unemployment
/Resources of the nation can be directed towards urgent priorities quickly
Disadvantages of Command economies?
/There is a continual lack of efficiency as central planning always results in surpluses or shortages of goods/services
/Black markets multiply as the population seeks to address shortages
/Access to higher standards of living is. limited for most of the population
/Personal freedoms are restricted
Role of the state in a mixed economy?
Some mixed economies have a higher level of government intervention than others. Government intervention occurs mainly through taxation (to raise revenue) and then spending that revenue to redistribute income and provide essential goods/services.
