1.1.6 - Free market economies, mixed economy and command economy

Question 1

What are the 4 types of economy?

Answer 1

Traditional economy
Mixed economy
Free economy
Command economy

Question 2

What is a traditional economy?

Answer 2

Each new generation retains the economic position of its parents and grandparents.

Question 3

What is a Command economy?

Answer 3

The State/Government controls all resources

Question 4

What is a Free Market economy?

Answer 4

Based on consumers buying decisions

Question 5

What is a Mixed economy?

Answer 5

Combines the Command and Free Market models.

Question 6

What are the advantages of the Command Economy?

Answer 6

Welfare Maximised - Govt has more control over the economy so they can minimise inequality by redistributing income fairly.

Low unemployment - The Govt can try to provide everyone with a job and salary.

Prevent Monopolies - When single firms dominate the market.

Question 7

What are the advantages of Free Market Economy?

Answer 7

Efficiency - Any product can be bought or sold. Only those of the best value (price/quantity) will be in demand. So firms have an incentive to make goods as efficiently as possible.

Entrepreneurship - A market economy rewards good ideas like products. This encourages risk taking and innovation as entrepreneurs can make a lot of money

Choice - The incentives for innovation leads t great choice to the consumer. Not just limited to buying what the government recommends

Question 7

What are the disadvantages of the Command Economy?

Answer 7

Poor decision making - A lack of information means that Govt often make slow and poor decisions about what needs to be produced

Restricted choice - Consumer have limited choice as firms make what they are told to make

Lack of risk taking and efficiency - Govt owned firm have no incentive to increase efficiency, take risks or innovate since they do not need to make a profit.

Question 8

What are the disadvantages of Free market Economy?

Answer 8

Inequalities - Market Economies lead to a huge differences in income. Many see this as unfair. In a pure free market economy anyone not able to work would receive no income

Non profitable Goods would not be made - Street lighting, care for vulnerable, drugs to treat rare conditions would not happen since the the firm would not make a profit.

Monopolies - Successful firms can grow and dominate the market. These can become the only supplier of the product and this dominance can be abused

Question 9

What are the features of a Command Market?

Answer 9

The Government decides how resources should be allocated and what should be produced.

Question 10

What are the features of a Free Market?

Answer 10

Goods are allocated based on supply and demand and the price mechanism. Anything can be sold at any price people are willing to pay.

Question 11

How does the Government control the market in the command economy?

Answer 11

Some times when Market fails it leads to undesirable outcomes like traffic congestion, pollution and sale of drugs.

Government can intervene in few different ways.
Change the law for force/stop firms from doing something

Change tax level to incentivise or punish behaviour

Government can intervene in the economy by buying or selling goods and services like NHS, education and defence

Question 12

What is the role of the state in the Mixed Economy?

Answer 12

When both the government and the market play a part in allocating resources this is called a mixed economy.
In a mixed economy the Government is known as the public sector
All businesses make up the private sector
In a pure free market there would be no public sector whilst in a pure command economy there would be no private sector.

Question 13

What are the 3 different approaches in the economy’s

Answer 13

What to produce?
Market economy - Determined by consumer’s preferences.
Command economy - Determined by government preferences.
Mixed economy - Determined partly by consumers preferences and partly by government.

How to produce?
Market economy - Determined by producers seeking profits.
Command economy - Determined by government and their employees.
Mixed economy - Determined partly by producers seeking profits and partly by government.

For whom?
Market economy - Determined by purchasing power.
Command economy - Determined by government preferences.
Mixed economy - Determined partly by government and partly by purchasing power.

Question 14

Who are the 3 economic thinkers?

Answer 14

Adam Smith
Karl Marx
Friedrich Hayek

Question 15

Who was Adam Smith and what were his beliefs about the economy?

Answer 15

-Believed in the free market
-Described how the ‘Invisible hand’ Would allocate resources in societies best interests.
-Invisible hand = Self interest balanced by competition.
-Invisible hand leads to lots of choice for consumers and lower prices.
-Invisible hand lead to FOP being allocated where they need to be
-In free market demand and supply will lead to price levels that work for buyer and seller.
-Govt don’t need to be involved in market except to create conditions for businesses
-Believed in the benefits of specialisation and division of labour.
-Believed economy existed for benefit for consumers

Question 16

Who was Karl Marx and what were his beliefs about the economy?

Answer 16

-Believed the economy should exist for the benefit of the workforce
-Critic of the free market believed there was excessive desire for profits, over specialisation and over production/underconsumption
-Labour is the most important economies exist for the workers
-Believed capitalism lead to a small ruling class of producers dominating and exploiting the workforce.
-Specialisation lead to boredom will reduce efficiency
-Workers will revolt

Question 17

Who was Friedrich Hayek and what were his beliefs about the economy?

Answer 17

-Supporter of the free market and critic of the command economy.
-Govt should not intervene to allocate resources as they lack the info required to allocate them in a way that most benefits society
-Individual consumers and producers have best knowledge on what they need
-Allocation of resources should be left to them and the price mechanism
-Price is set by the forces of supply and demand and shows what producers and consumers want
-S and D therefore will naturally allocate resources more efficiently than governments can.