1.1.6 - Free Market, Mixed & Command Economies

Question 1

What Does The Economic System Aim To Do?

Answer 1

Allocate scarce resources.

Question 2

What Is A Free Market Economy?
(3 Points)

Answer 2

~ Individuals are free to make their own choices and own FOPs without government intervention.

~ Resources are allocated through the price mechanism.

~ Adam Smith has an involvement in this.

Question 3

What Was Adam Smiths Involvement In The Free Market Economy?

Answer 3

~ He advocated for free markets with low levels of government intervention.

~ He recognised that there was a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods.

~ However, he believed economies functioned best when private individuals work in their own self-interest.

Question 4

What Are The Advantages Of A Free Market Economy?
(4 Points)

Answer 4

~ Profit incentive motivates people to work or to develop entrepreneurial ideas.

~ There is greater variety of goods and services.

~ Increased competition leads to higher quality and lower prices of products and encourages innovation.

~ A more efficient use of scarce resources.

Question 5

What Are The Disadvantages Of A Free Market Economy?
(4 Points)

Answer 5

~ Product quality can fall due to incentive to increase profits.

~ Workers may get exploited.

~ Increased resource depletion and environmental degradation.

~ Monopolies developing due to firms seeking increased market power.

Question 6

What Is A Command Economy?
(3 Points)

Answer 6

~ All FOPs, except labour are owned by the state.

~ Resource allocation is carried out by the government.

~ Karl Marx has an involvement in this.

Question 7

What Was Karl Marx’s Involvement In The Command Economy?
(3 Points)

Answer 7

~ Believed that free markets lead to capitalism, in which the owners of the FOPs exploited the workers.

~ Creating inequality, leading to the breakdown between the classes.

~ The role of the state is to therefore share the means of production and ownership with all of the workers in society.

Question 8

What Are The Advantages Of A Command Economy?
(4 Points)

Answer 8

~ Social equality is the goal of the system, so there is less inequality.

~ All workers receive the same wage irrespective of career, helping to create social equality.

~ Less unemployment.

~ Government owns monopolies, so consumer exploitation can be avoided.

Question 9

What Are The Disadvantages Of A Command Economy?
(4 Points)

Answer 9

~ Receiving the same wage disincentives people to acquire difficult skills.

~ Lack of competition means less innovation.

~ Continual lack of efficiency as central planning results in shortages and surpluses of goods and services.

~ Access to higher living standards is limited for most of the population.

Question 10

What Is Mixed Economy?
(2 Points)

Answer 10

~ Both the free market mechanism and the government planning process allocate a significant amount of total resources in the economy.

~ Friedrich Hayek had an involvement in this.

Question 11

What Was Friedrich Hayeks Involvement In The Mixed Economy?
(3 Points)

Answer 11

~ Believed 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.

~ He felt that the threat to efficiency and economic growth is overly heavy government intervention.

Question 12

What Is The Governments Role In A Mixed Economy?
(3 Points)

Answer 12

~ Tax interventions.

~ Income is redistributed through the creation of welfare systems.

~ As well as a focus on infrastructure such as merit goods (Schools) and public goods (National defence).