1.1.6 Free Market, Mixed and Command Economies Flashcards
What is a free market economy?
Individuals are free to make their own choices and own the factors of production without government interference.
The consumer determines what is produces through their demand. They make descions based on utility whereas produces do so based on profits.
Adam Smith and Friedrich Hayek
What are the advantages of a free market economy?
- The system is automatic due to the invisible hand.
- Consumers have “consumer sovereignty”
- There is high motivation - work hard = high rewards.
- Firms produce efficiently.
- FM economies usually = Higher Growth (Cold War).
What are the disadvantages of a free market economy?
- High levels of inequality.
- Lack of merit goods and little control over demerit goods. - Externalities
- Resources wasted on advertisment etc.
- Problem of monopolies.
What is a command economy?
All the factors of production, except for labour, is owned by
the state.
There is no private property and everyone is assumed to be selfless and working for a common good.
All workers, no matter the job recieve the same wage.
Karl Marx
Advantages of a command economy?
- The state provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality.
- Less wastage of resources on advertisement.
- Motivation based off wellbeing not profit maximisation.
Disadvantages of a command economy?
- Impossible for a state to make so many descions correctly.
- Less motivation for effiency as everyone earns the same wage.
- Corruption.
What is a mixed economy?
This is an economy where both the free market mechanism and the government planning and intervention process allocate a significant amount of the total resources in the country.
What is a governments role in a mixed economy?
- Creates a framework of rules - e.g. prevent abuse of monopolies.
- Supplments and modifies the price system / considers externalities - produce public and merit goods.
- Redistributes income - benefits and income tax.
- Stabilise the economy through fiscal / monetary policy.
