1.1.6 - types of economy Flashcards
What is a command economy?
All economic decision are taken by central authorities.
- plans allocation of resources of each industry/firm based on current and future consumption
- plans distribution of output between consumers
- collective ownership of FOPs
What is a free market economy?
All economic decision are taken by individual households with no government intervention.
- consumers choose what they buy, firms choose what they sell and how they are produced
- supply and demand impacts prices paid by consumers
- private ownership of FOPs
What is a mixed economy?
Economic decisions are made partly by governments and partly through markets.
- governments may control relative prices/incomes, pattern of production and consumption, unemployment problems, inflation, interest rates, exchange rates etc.
What is the invisible hand of the market?
Markets guide production and consumption like an invisible hand. The state should rarely interfere with the functioning of the economy, allowing for free enterprise for firms and free trade between countries.
What are the advantages of a free market economy?
- the economy responds quickly to changing demand and supply
- competition keeps prices down and improves efficiency
- workers are efficient, jobs are secures and wages are high
- encourages efficient use of resources to minimise scarcity
What are the disadvantages of the free market economy?
- Giant firms have a monopoly over industries, leading to customer exploitation and low wages
- lack of competition reduces incentive for firms to be efficient
- power and income unequally distributed
- practices of firms are socially undesirable eg. pollution
- economic instability
- encourages greed
- less services available
What are the advantages of a command economy?
- unemployment can be avoided
- national income distributed more equally to fit needs
- can prevent market failure
- inequalities avoided
What are the disadvantages of a command economy?
- difficult and costly to analyse and collect data, this may involve inefficient use of resources
- difficult to devise incentives to encourage workers to be productive, large number of workers employed
- less individual liberty for workers and consumers
- consumers change minds leading to shortages and surpluses
- dictatorships
What is the role of the state in a mixed economy?
The state may control relative prices by taxing and subsidising goods. Legislation controls production and consumption and control relative incomes through income taxes. They attempt to rectify market failings and problems such as unemployment, inflation, lack of growth.
What did Karl Marx believe about the economy?
Capitalism exploits workers so that Capitalists can make a profit. Workers earn low wages and complete monotonous jobs, leading to unemployment. Competition leads to some firms going bust and a few large firms would hold the monopoly. The system would cause many problems and crises and eventually self-destruct, leading to communism by revolution from the Proletariat. Communism would lead to the common ownership of resources and abolition of private property.
What did Adam Smith believe about the economy?
If consumers and capitalists pursued their own self-interest, they would be led by the invisible hand and resources would be allocated to best fit needs of society. Competition means that firms produce goods at the lowest cost and highest efficiency, leading to fair prices. Specialisation and division and labour increases productivity as workers repeat the same tasks. He believed the government should not be involved with the economy.
What did Friedrich Hayek believe about the economy?
He supported the free market and didn’t believe in government intervention. Individuals should make their own decisions as they have knowledge of their own situation. Price movements occur naturally and firms will choose how to act to fit supply and demand. The market will reflect all of this information and the best outcome of resource allocation is achieved.
