1.1.7 Free Market Economies, Mixed and Command Economies Flashcards
What is an economic system
network of organisation used to resolve what, how much, how and for whom to produce
i.e. a way of solving the basic economic problem
What are the three type of economy systems
Free Market Economy
Planned or Command Economy
Mixed Economy
Describe a free market Economy
And the role of the Government
Markets allocate resources through the price mechanism
Increase in demand raises price, and encourages businesses to put more resources into production
Quantity of products consumed, depends of income and market value of a individuals work
Limited role for the government, only for protect property rights and value of money
Describe a planned or command economy
And the Role of the Government
associated with socialist/communist system
Government owns scarce resources
State allocates resources and sets production targets and growth rates of what they think people want
Market prices play little/no part in resource allocation
Describe a mixed economy
And the Role of the Government
some resources owned by public sector (gov) and some owned by private sector
Public sec typically supplies public, quasi-public and merit goods and intervenes in market failure
Nearly all economies in the world are mixed
6 Benefits to free market economies
1) efficient allocation of scarce resources - factor inputs tend to go where expected profit is highest, therefore representing goods/service most demanded
2) Competitive prices for consumers as suppliers look to increase/protect market share
3) Competitiveness drives innovation + invention bringing higher profit and better products
4) Competition has helped reduce domestic monopoly power and choice
5) Historically this type of economy has grown quickest than command
5 Disadvantages to free-market economies
1) Some members of society are unable to work and without Gov intervention, these people will fall into poverty
2) Demerit goods may be over-produced (e.g. alcohol) and merit good not consumed in large enough quantities (e.g. healthcare) due to the fact it may not be provided by Gov
3) Someone’s goods may grow so large they gain monopoly power, allowing them to change very high prices
4) Public goods will not be provided
3 Advantages to a Planning/Command economy
1) There is generally low level if inequality and unemployment
2) Resources are allocated according to common good than profit motive
3) May be more straight forward/fast to build large-scale infrastructure projects
7 Disadvantages to a Planning/Command Economy
1) Bureaucratic costs of central planning or resources
2) Problems with fixing prices of goods/services
3) Absence of incentives for workers and businesses and damage productivity and over-employment
4) Low productivity/incentives leads losses for businesses and lack of innovation
5) Changing consumer needed/wants to expresses as preferences in markets
6) state suffer from information failures and corruption
7) higher risk or mal-investment driven by political motives
What is Adam smith believe in
in his 1776 book ‘Wealth of Nations’ wrote about the ‘invisible hand’ of resource allocation and role of ‘self-interest’, in an early ref to free-market economies
What did Karl Marx believe
Free market economies would lead to a large increase in productivity and output, however effect on labours would be terrible
The drive for profit by business owners in the capitalist system would push wages to subsistence levels and exploited workers would work together to overthrow Capitalism and resolution
Capitalism would be replaced with socialism where production would be coordinated centrally
What did Friedrich Hayek believe
in role and importance of individuals in economy rather than group or Gov
Gov intervention in money markets gave economic instability and Gov less of a role than Smith and only to maintain law and order
Argued against command economies as the small group of individuals would never have enough info
Markets alone would have enough info to make allocation of resources
