1.1.6: Types Of Economies Flashcards
What is a free market economy?
An economy where factors of production are owned privately without government interference.
What are the features of a free market economy?
•Motivation of self-interest (entrepreneurship).
•Privately owned firms.
•Market mechanisms.
What are market mechanisms?
Allowing the change of supply and demand to determine resource allocation.
What did Adam Smith say?
FREE MARKET
•Laissez-faire (leave alone) approach.
•There is an ‘invisible hand’ in the market which allocates resources to everyone’s advantage.
•Competition in the market causes lower prices.
What did Frederick Hayek say?
FREE MARKET
•State control of the ‘condos’ leads to less freedom.
•Doesn’t want a small minority forcing plans on society.
•Intervention in money markets is a main cause of economic instability.
What are advantages of the free market economy?
•The system is automatic due to the ‘invisible hand’.
•Incentive for productive efficiency.
•Freedom of choice for consumers.
What are disadvantages of the free market economy?
•High levels of inequality.
•Resources could be wasted on unproductive expenses (e.g. advertising).
•Monopoly abuse.
What is a command economy?
An economy where factors of production (expect labour) are owned by the state, and labour is directed by the state.
What are the features of a command economy?
•Everyone is selfless, working towards a common good.
•Resource allocation is carried out by the government.
•All workers receive the same wage.
What did Karl Marx say?
COMMAND ECONOMY
•Capitalists exploit labour and underpay workers.
•Capitalism will fall to a Communist revolution.
•There is a two class system in Capitalism.
What are advantages of a command economy?
•Provides a minimum standard of living.
•Less wastage of resources.
•Higher levels of equality.
What are disadvantages of a command economy?
•An increase in bribery and corruption.
•Consumers lose their freedom.
•Lack of incentive.
What is a mixed economy?
An economy where both the free-market mechanism and government planning process allocate the country’s resources.
What is the government’s role in a mixed economy?
•Redistribute income: income tax and benefits.
•Regulation: preventing monopoly abuse.
•Supplements: producing merit goods while inhibiting demerit goods.
