1.6 Types Of Exonomy Flashcards
What is a market?
A market is anywhere buyers and sellers exchange goods and services. This can be physical or digital
What is a price mechanism
The process by which the market allocates resources
What is a free market economy? (Example)
An economy in which the resources are allocated solely based on supply and demand
-USA
What are the advantages of a free market economy?
- More efficient : due to higher demand from customers, firms are likely to lower prices and make more efficient use of resources
- Consumers have more choice as there is more innovation due to profit motive
- More personal and political freedom
What are the disadvantages of a free market economy?
Can lead to monopolies and a rise in income inequality
What is the profit motive?
Firms have the incentive to make profit, they do this by minimising costs and maximising profits
What is competition?
In a market, firms have to meet consumer wants and needs otherwise the consumers may switch to the competitors
What do the profit motive and competition lead to?
- Cost effective production
- More choice for consumers
- Higher quality and innovation
What is a mixed market economy?
An economy in which resources are allocated by the state and by supply and demand. Public and private sectors
What is the role of state in a mixed economy
-Creating a framework of rules
-Stabilising the economy
-Redistribution of income (to ensure there is minimal income inequality)
What is a command economy?
-An economy in which the government determines what goods should be produced and the price which they will be sold
- everyone receives the same wage regardless of their job
What are the advantages of a command economy?
-Prevents mass unemployment (working for the “common good”)
-Less wastage of resources
- Merit goods are encouraged and demerit goods are rare
What are the disadvantages of a command economy?
- Less motivation and efficiency as people can’t change jobs
- Less choice, innovation and lower quality due to the absence of profit motive
- Less consumer freedom
- State can’t make all the right decisions which would lead to a waste of resources
What is the public sector?
The part of an economy which is controlled or owned by the government
What is the private sector?
The part of an economy which is not controlled or owned by the government.
