1.1.6 Types of Economies Flashcards
what is resource allocation
resource allocation is concerned with the methods used by an economy to deploy its resources among alternative uses
what are the three types of economy
market, command, mixed
what is a market economy
in a free market economy, individuals are free to make their own choices and own the factors of production without government interference
how are resources allocated in a market economy
via the price mechanism
how does the price mechanism work
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
what does it mean that consumers are sovereign
their preferences dictate the use of resources with prices acting as a signal in the market
what are other features of a market economy
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
what were adam smith’s opinions related to types of economies
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
what were frederich hayek’s opinions related to types of economies
he argued that state control in the economy leads to the loss of freedom
what does the capitalist state mean
there is private ownership and individuals are free to pursue their objectives with minimal interference from the government
give examples of countries that are close to free market economies
USA south korea and singapore
explain the demand advantage of free market economies
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
explain the competition advantage of free market economies
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
explain the innovation advantage of free market economies
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
explain the choice advantage of free market economies
increased choice for consumers who can choose products from a variety of different producers
explain the officials advantage of free market economies
no officials are used to allocate resources unlike in a planned economy, saving significant costs
explain the monopoly disadvantage of free market economies
monopolies may form if firms takeover competitors, reducing choice and increasing prices for consumers
explain the goods disadvantage of free market economies
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
explain the environmental damage disadvantage of free market economies
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
explain the disparity disadvantage of free market economies
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
explain the trade cycle disadvantage of free market economies
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
what does the success of market economies depend on
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
what is a command economy
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
how does a command economy work
the Government appoint central planners to assess the needs of the population, to organise production to ensure supply meets the needs of the people
how are resources allocated in a command economy
resources are allocated to production units e.g farms, and the managers are set output targets to achieve with those resources
what are other features of a command economy
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
give examples of countries that are close to command economies
USSR
cuba
north korea
what were karl marx’s opinions related to types of economy
marx believed in the command economy and criticised capitalism
explain the inequality advantage of command economies
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
explain the monopoly advantage of command economies
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
explain the trade cycle advantage of command economies
command economies can prevent less swings in the economic cycle as the government intervene to achieve steady growth
explain the public services advantage of command economies
command economies provide essential public services to ensure adequate supply e.g healthcare
explain the employment advantage of command economies
full employment as the government direct labour to work, avoiding waste of labour resources
explain the poor information disadvantage of command economies
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
explain the poor innovation disadvantage of command economies
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
explain the poor quality goods disadvantage of command economies
poor quality goods due to lack of competition and focus of government on maximising output not quality
explain the bureaucracy disadvantage of command economies
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
explain the restrictions disadvantage of command economies
restrictions of freedom of choice as people would be directed into the jobs as deemed fit by the government
what does the success of command economies depend on
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
why are market forces introduced in most command economies (exception being north korea)
hugely bureaucratic so inefficiency is rife and such economies have consequently grown at a much slower rate than other economies
what are mixed economies
mixed economies have some resources owned and allocated by private firms yet others by the government
how are resources allocated in the private sector
resources are allocated according to consumer preferences through the price mechanism
how are resources allocated in the public sector
government priorities determine resource allocation e.g more spending on healthcare increases resources used in the sector
in mixed economies, what do the government intervene to do
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
give examples of mixed economies closer to market
UK, Germany
give examples of mixed economies closer to planned
China, Sweden, France
