1.2 The Three Basic Economic Questions

Question 1

What are the three basic economic questions?

Answer 1

• What to produce?
• How to produce?
• For who to produce?

Question 2

What do free market/classical economists believe in?

Answer 2

They believe there should be no government intervention because markets will adjust automatically. You should therefore leave the market to work by themselves.

Question 3

What do interventionists/ keynesians economists believe in?

Answer 3

They believe that the government should intervene. And therefore play an essential role at preventing market failure.

Question 4

What are the 3 types of economies?

Answer 4

Planned, mixed and free market economy

Question 5

What is a planned economy?

Answer 5

Relies on the government to make all economic decisions

• -> includes allocation of resources, and controlling wages
• eg. North Korea

Question 6

What is a free market economy?

Answer 6

Driven by consumers, whose decisions determine how the industries and financial markets will operate
- eg. USA

Question 7

What is a mixed economy?

Answer 7

Utilizes limited government involvement while also applying free market concepts
- eg. Belgium, France..

Question 8

What is are some advantages of a market economy?

Answer 8

• Motivation (people will want to study for better jobs)

- Company competition (so lower prices)

Question 9

What are some disadvantages of a market economy?

Answer 9

• Higher inequality

- Poverty rates

Question 10

What are some advantages of a planned economy?

Answer 10

• Less inequality of wealth
• Prices kept under control
• Low level of employment as the government aims to provide employment for everyone

Question 11

What are some disadvantages of a planned economy?

Answer 11

• Lack of motivation

- Lack of competition (and thus also innovation)