1.1.6 Types of Economies

Question 1

what is resource allocation

Answer 1

resource allocation is concerned with the methods used by an economy to deploy its resources among alternative uses

Question 2

what are the three types of economy

Answer 2

market, command, mixed

Question 3

what is a market economy

Answer 3

in a free market economy, individuals are free to make their own choices and own the factors of production without government interference

Question 4

how are resources allocated in a market economy

Answer 4

via the price mechanism

Question 5

how does the price mechanism work

Answer 5

if demand increases for a product, the price of the product will increase and this acts as a profit incentive to increase supply
therefore, more resources are moved into the product to meet consumer preferences

Question 6

what does it mean that consumers are sovereign

Answer 6

their preferences dictate the use of resources with prices acting as a signal in the market

Question 7

what are other features of a market economy

Answer 7

all resources, including firms, are privately owned

consumers attempt to maximise their satisfaction from consumption

firms attempt to maximise their profits

the government has a limited role that focuses on providing a legal framework that protects people’s property rights but they do not provide goods and services

Question 8

what were adam smith’s opinions related to types of economies

Answer 8

he believed in the free market economy and the laissez-faire approach by governments (let it be), described the price mechanism as an invisible hand and concluded that self-interest drives the economy

Question 9

what were frederich hayek’s opinions related to types of economies

Answer 9

he argued that state control in the economy leads to the loss of freedom

Question 10

what does the capitalist state mean

Answer 10

there is private ownership and individuals are free to pursue their objectives with minimal interference from the government

Question 11

give examples of countries that are close to free market economies

Answer 11

USA south korea and singapore

Question 12

explain the demand advantage of free market economies

Answer 12

goods and services are produced that consumers demand and therefore waste is avoided as unwanted goods are not made - firms aim to make a profit and will produce what they can sell

Question 13

explain the competition advantage of free market economies

Answer 13

competition tend to lead to efficiency because businesses that have fewer costs are more competitive and make more money. efficiency in production improves an economy’s use of scarce resources

Question 14

explain the innovation advantage of free market economies

Answer 14

innovation is encouraged because it provides a competitive edge and increases the chance for profit. innovation can lead to greater efficiency or it can lead to improved quality of goods

Question 15

explain the choice advantage of free market economies

Answer 15

increased choice for consumers who can choose products from a variety of different producers

Question 16

explain the officials advantage of free market economies

Answer 16

no officials are used to allocate resources unlike in a planned economy, saving significant costs

Question 17

explain the monopoly disadvantage of free market economies

Answer 17

monopolies may form if firms takeover competitors, reducing choice and increasing prices for consumers

Question 18

explain the goods disadvantage of free market economies

Answer 18

some goods may not be produced at all (public goods) and some may be produced in insufficient quantities (merit goods), due to the inability to make a profit, therefore consumer’s wants are not being met

Question 19

explain the environmental damage disadvantage of free market economies

Answer 19

environmental damage results with no government regulations because it’s usually more expensive to produce in an environmentally sound manner, which reduces profits. therefore finite resources can be over-used, limiting sustainable development

Question 20

explain the disparity disadvantage of free market economies

Answer 20

lower income groups suffer due to a disparity in wealth and mobility. this exists in market economies because wealth tends to generate wealth. hence firms produce what consumers can afford to buy not what is needed by society

Question 21

explain the trade cycle disadvantage of free market economies

Answer 21

trade cycles occur as there is no government intervention to try to stabilise the economy so there will be booms/recessions with high costs of inflation/unemployment

Question 22

what does the success of market economies depend on

Answer 22

how mobile resources are e.g how easily workers can switch from producing one product that is falling in demand to producing one increasing in demand

whether firms use their profits to innovate (or instead pay shareholders more dividends)

whether consumers can make the best decisions to ensure an efficient allocation of resources e.g may not have perfect information and may consume a good that is bad for them

Question 23

what is a command economy

Answer 23

all factors of production, except labour, are owned by the state and labour is directed by the state
there is no private property and everyone is assumed to be selfless, working for a common good

Question 24

how does a command economy work

Answer 24

the Government appoint central planners to assess the needs of the population, to organise production to ensure supply meets the needs of the people

Question 25

how are resources allocated in a command economy

Answer 25

resources are allocated to production units e.g farms, and the managers are set output targets to achieve with those resources

Question 26

what are other features of a command economy

Answer 26

there is no private enterprise

income distribution is determined by the government, and all workers no matter their job tend to receive the same wage, products are standardised and prices are limited causing excess demand and queueing

the motive of the government is to maximise welfare for all ie ensure equality

Question 27

give examples of countries that are close to command economies

Answer 27

USSR
cuba
north korea

Question 28

what were karl marx’s opinions related to types of economy

Answer 28

marx believed in the command economy and criticised capitalism

Question 29

explain the inequality advantage of command economies

Answer 29

the government can overcome inequality and create a society that maximises social welfare rather than profit, ensuring low income groups have a basic standard of living

Question 30

explain the monopoly advantage of command economies

Answer 30

command economies can prevent abuse of monopoly power as all firms are owned by the government who will run firm in the public interest, preventing firms from exploiting consumers with higher prices

Question 31

explain the trade cycle advantage of command economies

Answer 31

command economies can prevent less swings in the economic cycle as the government intervene to achieve steady growth

Question 32

explain the public services advantage of command economies

Answer 32

command economies provide essential public services to ensure adequate supply e.g healthcare

Question 33

explain the employment advantage of command economies

Answer 33

full employment as the government direct labour to work, avoiding waste of labour resources

Question 34

explain the poor information disadvantage of command economies

Answer 34

government agencies usually have poor information about what to produce, leading to poor decisions such as overproduction of some goods and underproduction of others - therefore inefficient allocation of resources

Question 35

explain the poor innovation disadvantage of command economies

Answer 35

poor innovation and inefficiency as there is no profit motive nor competition to drive improvement - hence they lag behind market based economies in improving their use of scarce resources

Question 36

explain the poor quality goods disadvantage of command economies

Answer 36

poor quality goods due to lack of competition and focus of government on maximising output not quality

Question 37

explain the bureaucracy disadvantage of command economies

Answer 37

command economies tend to be very bureaucratic with decisions held up by planning and committees. this ties up a lot of resources which could be put to better use

Question 37

explain the restrictions disadvantage of command economies

Answer 37

restrictions of freedom of choice as people would be directed into the jobs as deemed fit by the government

Question 38

what does the success of command economies depend on

Answer 38

the reliability of research conducted by the central planners who determine what needs to be produced, this might not be detailed enough
the independence of the monitoring in place the ensure production units are operating efficiently, fear they may be corrupt, open to bribes
the size of the economy, large economies are difficult to coordinate efficiently - chances of communication problems

Question 39

why are market forces introduced in most command economies (exception being north korea)

Answer 39

hugely bureaucratic so inefficiency is rife and such economies have consequently grown at a much slower rate than other economies

Question 40

what are mixed economies

Answer 40

mixed economies have some resources owned and allocated by private firms yet others by the government

Question 41

how are resources allocated in the private sector

Answer 41

resources are allocated according to consumer preferences through the price mechanism

Question 42

how are resources allocated in the public sector

Answer 42

government priorities determine resource allocation e.g more spending on healthcare increases resources used in the sector

Question 43

in mixed economies, what do the government intervene to do

Answer 43

provide defence and internal security
provide other essential services e.g education, law and order
redistribute income e.g taxing rich, benefits to low income groups
pass laws to protect groups e.g consumers/workers
protect the environment
regulate business behaviour e.g stop price fixing

Question 44

give examples of mixed economies closer to market

Answer 44

UK, Germany

Question 45

give examples of mixed economies closer to planned

Answer 45

China, Sweden, France