1.1.6- free market, mixed + command economies Flashcards
What is a free market economy?
where consumers and businesses are free to make their own choices and own the factors of production without government intervention. Resources are allocated through the price mechanism (the force of supply and demand).
What are the advantages of a free market?
- system is self-regulating due to the invisible hand , resources are moved out of production when consumers no longer demand them or when a firm deems the costs too high.
-Consumers have freedom of choice and thus possess consumer sovereignty.
-There is high motivation as people know working hard could lead to high potential rewards, creating conditions where initiative and enterprise flourish.
-Because firms are in competition, they will produce goods at the lowest cost they can, ensuring productive efficiency. This will help them to achieve more profits leading to greater levels of dynamic efficiency and innovation.
What are the disadvantages of a free market?
-There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer.
-There may be a lack of merit goods (goods that are beneficial for society) and little control of demerit goods (goods that are harmful for society.
-If competition disappears then there may be monopolies, who charge high prices and restrict output.
-There is the problem of externalities (3rd party effects) of production and consumption.
What is a command economy?
where all factors of production, except labour, is owned by the state and labour is directed by the state.
What are the advantages of a command economy?
-The state provides a minimum standard of living , ensuring no one is extremely poor as there is less inequality.
-Long term planning means that the industry doesn’t have to keep changing and shifting resources.
-Standardised products means that they are produced cost effectively.
-As the government, who are generally motivated by the wellbeing of the country, rather than the companies, who are motivated by profit, decide resource allocation, objectives other than profit can be followed.
Disadvantages of a command economy
-It is impossible for the state to make so many decisions correctly, which could lead to over or under supply and thus a potential waste of resources
- Decision making will be slow as it has to go through various stages and there could
be an increase in bribery and corruption (an increase in bureaucracy).
-As everyone receives the same wage, there is less motivation and efficiency
because people know that working harder will not increase their standard of living.
What is a mixed economy?
This is an economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country . Each country will have a different amount of control by the government, but it is usually between 40-60%.
What is the role of the government in a mixed economy?
-creating a framework of rules (Prevention of monopolies, Copyright laws)
- Supplements and modifies the price system
(Production of merit goods and public goods)
- Redistributes income Progressive taxation
Welfare benefits (UCS)
- Stabilises the economy
Macroeconomic objectives
