economic systems Flashcards
what are the three main economic questions
what goods should be produced
how should the goods be produced
who should the goods be produced for
what is an economic system
a system that dictates the allocation of resources production and distribution of goods and services in a society
what is the market mechanism
when goods and services purchased in a system of markets facilitated by the price mechanism - a free market economy
what is the planning mechanism
when goods and services produced on the basis of resource allocation decided on by the state - pure command economy
what is the market and planning mechanism
when both markets and the state play a role in allocating resources to make goods and services - the mixed economy
what is a command economy
an economy that is managed solely by the government
what is a mixed economy
an economy that is managed by the government and part of it is left to the free market
what is a free market economy
an economy left to the free market
give 3 examples of a command economy
- China
- Russia
- North Korea
which economy did Karl Marx support
a command economy
what were Karl Marx’s views on capitalism
- 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
what are 2 advantages of a command economy
speed - can mobile resources on a large scale quickly
unity - can wholly change an economy to meet a government vision
what market did Adam Smith & Fredrick Hayek support
a free market economy - Hayek believed there should be some government intervention
what are 3 characteristics of a free market economy
- 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
what is consumer sovereignty
the idea that consumers can control production decisions based on what goods and services they purchase
what are 3 advantages of a free market
- 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
what are 4 disadvantages of a free market
- 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
why does inequality occur in a free market economy
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
how are resources allocated in a mixed economy
some resources such as public services are provided by the government to everyone, other resources are paid for by consumers
what are 3 advantages of a mixed economy
- 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
what are 3 disadvantages of mixed economies
- how much should the government intervene
- too much equality - progressive taxation
- government failure
