economic systems

Question 1

what are the three main economic questions

Answer 1

what goods should be produced
how should the goods be produced
who should the goods be produced for

Question 2

what is an economic system

Answer 2

a system that dictates the allocation of resources production and distribution of goods and services in a society

Question 3

what is the market mechanism

Answer 3

when goods and services purchased in a system of markets facilitated by the price mechanism - a free market economy

Question 4

what is the planning mechanism

Answer 4

when goods and services produced on the basis of resource allocation decided on by the state - pure command economy

Question 5

what is the market and planning mechanism

Answer 5

when both markets and the state play a role in allocating resources to make goods and services - the mixed economy

Question 6

what is a command economy

Answer 6

an economy that is managed solely by the government

Question 7

what is a mixed economy

Answer 7

an economy that is managed by the government and part of it is left to the free market

Question 8

what is a free market economy

Answer 8

an economy left to the free market

Question 9

give 3 examples of a command economy

Answer 9

• China
• Russia
• North Korea

Question 10

which economy did Karl Marx support

Answer 10

a command economy

Question 11

what were Karl Marx’s views on capitalism

Answer 11

• said the free market would eventually destroy itself
• thought capitalist’s exploited workers and that competition would cause firms to go bankrupt
• viewed the free market as flawed

Question 12

what are 2 advantages of a command economy

Answer 12

speed - can mobile resources on a large scale quickly
unity - can wholly change an economy to meet a government vision

Question 13

what market did Adam Smith & Fredrick Hayek support

Answer 13

a free market economy - Hayek believed there should be some government intervention

Question 14

what are 3 characteristics of a free market economy

Answer 14

• firms and private individuals make decisions
• a pure free market economy has no government intervention
• usually have government intervention for rules and laws
• Adam Smith thought when people maximize utility it leads to the best outcome for society

Question 15

what is consumer sovereignty

Answer 15

the idea that consumers can control production decisions based on what goods and services they purchase

Question 16

what are 3 advantages of a free market

Answer 16

• avoids bureaucracy in government intervention
• economic freedom is important for personal freedom
• the profit motive provides incentives to cut costs and use scarce resources the best they can

Question 17

what are 4 disadvantages of a free market

Answer 17

• public goods are not provided e.g. healthcare
• monopolies - in an unchecked market monopolies can easily develop
• merit good - education and healthcare is underprovided because people underestimate the value of school
• agriculture is prone to market failure

Question 18

why does inequality occur in a free market economy

Answer 18

there is no social equality for those who are unemployed or have a low income - the benefits only go to a small amount of people

Question 19

how are resources allocated in a mixed economy

Answer 19

some resources such as public services are provided by the government to everyone, other resources are paid for by consumers

Question 20

what are 3 advantages of a mixed economy

Answer 20

• incentives to be efficient - most firms are private so have incentive to cut profits and be innovative
• reduces market failure - the government can step in and regulate failing areas of the market
• a degree of equality - provides safety net to prevent people living in absolute poverty

Question 21

what are 3 disadvantages of mixed economies

Answer 21

• how much should the government intervene
• too much equality - progressive taxation
• government failure