Economic Systems Flashcards
What is a free market economy
An economic system based on the forces of demand and supply with little or no government intervention
Also known as capitalism
What are the characteristics of a free market economy (7)
Supply and demand determines what, how and for whom to produce goods and services
Prices act as signals in the free market
Individual can act on own initiative and has freedom of choice
Factors of production are privately owned and controlled
Private ownership is at the heart of the system
Business cycles are characteristic of free-market systems
Zero government intervention
What are the advantages of a free market economy (6)
Private ownership is most important advantage and backbone
Factors of production are managed and organised by the individual
Individuals can use profits to enhance their personal welfare
Freedom of entry into markets creates competition
Businesses can’t dominate market and exploit consumers
Huge profits and economic progress are features of upswing phases in the economy
What are the disadvantages of a free market economy (6)
Can lead to high levels of inequality
Each individual pursues the satisfaction of their needs but often to the detriment of others
Self-interest outweighs the interest of the community
Businesses only produce goods and services that are demanded
Harmful products are overprovided
Downswing phases result in unemployment and poverty
What is a centrally planned economy
The government determines what, how and for whom to produce goods and services
Communism and Socialism
Factors of production are communal property
What are the characteristics of a centrally-planned economy (7)
State is the biggest economic entity
Is a bureaucracy
Free choice of the individual is limited or even non-existent
State dictates to individuals
Factors of production are not privately owned - State controls all
State guides the needs and wants of the consumer by providing essential goods and services to all in equal quantities
Limited access to most essential goods and services
What are the advantages of a centrally-planned economy (6)
Serves need of community and not individual
State works for equal distribution of income and resources
Long-term planning - Economy can be controlled and steered in a particular direction
Less exploitation of natural resources
Environment experiences less deterioration
Full employment
What are the disadvantages of a centrally-planned economy (7)
Inefficient allocation of resources
Requires a huge amount of administration by civil servants
Low overall economy growth rate due to absence of private initiative
Long-term planning may result in large surpluses and shortfalls
Lack of private initiative leads to low productivity and low quality of output
Variety of goods and services may be too limited
Products are standardised and luxury goods regarded as unnecessary
What is a mixed economy
Economic system consisting of a mixture of private and public ownership
Combines both market economy and centrally-planned economy
What are the characteristics of a mixed economy (6)
Factors of production are privately owned but regulated by the government
State will intervene when market inefficiencies occur
People use own initiative to produce goods and services
Profit motive plays an important role
Extent to which economic activities are market-orientated depends on the level of government involvement
Public sector provides infrastructure and public services as there is little profit motive for these to be provided
What are the advantages of a mixed economy (5)
Private ownership
Size of government does not have to be bigger than necessary
Individuals have a freedom of choice to buy what they want
Competition
State still provides essential public goods and services
What are the disadvantages of a mixed economy (7)
Market failure occurs when scarce resources are wasted
Environmental deterioration is a problem and labour is often exploited
Too much state intervention hampers business activities
Taxes high to fund public goods and services
Most factors of production are privately owned
Individuals face risks of losses and bankruptcy
Quality of goods may be inferior
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