Chapter 3

Question 1

What are the characteristics of a free market system

Answer 1

-Market forces determine (what, how, for whom)
-Prices act as a signal
-Freedom of choice
-Profit (drives the system)
-Business cycles are characteristics of free market systems
-Zero government intervention

Question 2

What are the advantages of free market system

Answer 2

-Private ownership
-FoP managed and organized by individual
-Individuals can use their profits
-Good competition
-No exploitation (and market domination) of consumers
-Huge profits and economic progress

Question 3

What are the disadvantages of a free market system

Answer 3

-Inequality
-Satisfaction of one is usually to the detriment of another
-Self interest is more important than that of the community
-Produce only goods that are demanded
-Harmful products are over provided
-Downswing phases = unemployment and poverty

Question 4

What are the characteristics of a centrally planned economy

Answer 4

-The state is the biggest economic entity
-Bureaucracy is evident
-Limited free choice
-State dictates occupations
-State controls FoP
-Providing essential goods and services to all in equal quantities
-Limited access to most goods and services

Question 5

What are the advantages of a centrally planned economy

Answer 5

-Serves community needs over individuals
-Equal distribution
-Long term planning used to steer country in specific direction
-Less exploitation (Environment)
-less deterioration (Environment)
-Full employment

Question 6

What are the disadvantages of centrally planned economy

Answer 6

-Inneficiant allocation of resources
-Huge amount of administration by civil servants
-Low productivity and economic growth
-Large surplus and shortfalls
-Low productivity and low quality of output
-Too limited to satisfy customers taste
-Luxury goods regarded as unnecessary

Question 7

What are the characteristics of a mixed economy

Answer 7

-FoP privately owned but government regulated
-People use own initiative
-Profit motive
-Public sector provides infrastructure and public goods and servises

Question 8

What are the advantages of mixed economy

Answer 8

-Private ownership
-Size of the government is perfect
-Individuals have freedom of choice
-Good competition
-State still provides essentials

Question 9

What are the disadvantages of mixed economy

Answer 9

-Scarce resources are wasted and exploited
-Environmental deterioration
-Either too much or too little state intervention
-Taxes are high
-Most FoP are privately owned
-Individuals face risk of losses and bankrupcy
-Inferior quality of goods