Economic Systems Flashcards
Consumers
Looking to maximise utility (satisfaction)
Firms
Looking to maximise profit
Governments
Looking to maximise general welfare of society
Positives of a Command Economy
More focused on equality + fairness and less focused on profit
Income equality
Lower unemployment
Wider access to public services
Negatives of a Command Economy
Less incentive to work harder - productivity is more limited
Lower quality goods + services
Less choice of goods + services
Low productivity + lower GDP
Positives of a Free Market Economy
More choice + quality of goods + services
Lower prices + inflation
Higher income + higher GDP
Negatives of a Free Market Economy
Higher inequality
Limited public services
Market failure may arise
Roles of the government in a mixed economy
Regulation of the markets - resolve market failure
Provision of public services e.g. healthcare and education
Invisible Hand - Adam Smith
The free market forces that allow supply + demand of goods to allocate resources and reach equilibrium automatically
Why Adam Smith argues that direct governmental control of the market isn’t needed
As the private sector has two counter-balancing forces: the producer (maximise profit) and the consumer (maximum utility)
Both are promoted by self-interest
Thus markets will lead to an allocation of resources which is productively and allocatively efficient
Free Market - What to Produce?
Whatever will sell the most based on high demand to increase profit
Free Market - How to Produce?
The cheapest way possible to maximise profit
Free Market - For whom to Produce?
Whoever pays the most money so profit is higher
Free Market - Ownership
Private Property
Free Market - Incentive
Profit + Promotions
