Economic Systems Flashcards
What is a Market?
any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services
Why are markets important?
Prices act as a signal to potential buyers and sellers
If a firm can’t sell it’s output at the chosen price, this is a signal that consumer demand has fallen
Why are barter economics inefficient?
You need to find someone who has what you want and wants what you have = Double Coincidence of Wants
What functions does money perform?
Medium of Exchange
Measure of Value
Store of Value
Method of Deferred Payment
How is Medium of Exchange a function of money?
Used to buy and sell goods and services
Most important function
How is Measure of Value a function of money?
Allows value of goods and services can be compared
Price reflects value society places on them
How is Store of Value a function of money?
Nobody would accept money in payment if they did not trust they can use the money for future transactions
How is Method of Deferred Payment a function of money?
Money can be used to pay at future date for transactions carried out now
What is an economic system?
Complex network of individuals, organisations and institutions and their social and legal interrelationships
What is the function of the economic system?
Resolve the basic economic problem
What must an economic system determine?
WHAT is to be produced
HOW production is to be organised
FOR WHOM production is to take place
What are the main economic actors/agents?
Consumers
Factors owners
Producers
Government
What are consumers assumed to want?
Assumed to want to maximise their own economic welfare, utility or satisfaction
What are factors owners assumed to want?
Assumed to want to maximise returns
What are producers assumed to want?
Assumed to want to maximise profit
What are the government assumed to want traditionally?
Assumed to want to maximise social welfare for citizens
Establishes/influences relationships between groups
What are the 3 types of economic system?
Free Market
Mixed Economy
Planned Economy
What is a Free Market economy?
Economic System where resources are allocated by the price mechanism ie. supply and demand
What are most forms of production owned by in a Free Market Economy?
Owned by Private Individuals/Organisations
What determines how resources are allocated in a Free Market Economy?
No government intervention
Force of market supply and demand
What are consumers/producers/owners of private property motivated by in a Free Market Economy?
Self Interest
What are the owners of factors of production and producers free to do in a Free Market?
Buy and sell with few government limits
What is the political name for a free market economy?
Capitalism
What are the names of two Free Market Economists?
Friedrich Hayek
Adam Smith
What did Adam Smith believe?
By pursuing self interest, individuals would be led by ‘invisible hand’
This would lead to efficient allocation of resources
Competition in markets ensures firms produce goods at lowest possible cost
Greatest threat to economic growth = government intervention
What did Friedrich Hayek believe?
Critical of socialism
Governments should not intervene in resource allocation because they are faced with imperfect information
Markets are more effective because they rely on people responding to incentives and signals
Price mechanism acts as communication network
Market will aggregate to decisions and reflect society
What is a Command/Planned Economy?
Economic system where government, through planning process, allocate resources in society
Who provides jobs for workers in a Planned Economy?
The state
Who decides what is produced, how and for whom in a Planned Economy?
The state
How does resource allocation work in a Planned Economy?
Market prices play little/no part in informing resource allocation
Queuing rations scarce goods
What is the political name for a Planned/Command Economy?
Socialism/Communism
Who supported the idea of a Planned/Command Economy?
Karl Marx
What did Karl Marx think about Capitalism?
Criticised Capitalism
Believed small minority (bourgeoisie) who are owners of capital are ruling class
The masses (proletariat) who are labourers provide labour to produce goods and services
Owner of capitals objective is to make profit and to do this they exploit workers
Capitalism’s contradictions would lead to it self destructing and revolution among proletariat
Private property would be abolished replaced by common ownership of resources
What is a Mixed Economy?
Economic System where resources are partly allocated by price mechanism/market and partly by government/state
How does resource allocation work in a Mixed Economy?
Markets allocate many resources but government intervene to different extents in order to ensure minimum standard of living and correct market failure
What are the different sectors in a Mixed Economy?
Private Sector
Public Sector
What is the Private Sector in a Mixed Economy?
Private ownership of factors of production, competition
What is the Public Sector in a Mixed Economy?
State owned/run, resources allocated through planning process
Governments intervene by raising revenue though taxes and redistributing income through benefits and direct provision of services
What are producers/consumers motivated by in a Mixed Economy?
Self interest
What are the advantages of a Free Market Economy?
Competition (better quality and choice) Lower prices Freedom Profit Motive Customer Need should be met
What are the disadvantages of a Free Market Economy?
Market Failure (some goods wont be provided) Overproduction of negative externalities, underproduction of positive externalities Inequality
What are the advantages of a Command/Planned economy?
Public services provided
Guaranteed jobs for all
Equality
Guaranteed housing
What are the disadvantages of a Command/Planned economy?
Centralised decisions taken by people who may have imperfect information
Unable to respond to consumer preferences
Governments control peoples lives
Bureaucratic (red tape) with decisions held up by planning and committees
What are the advantages of a Mixed economy?
Competition Freedom Incentives to set up business More equal income distribution (through tax and benefits) Reduces inequality Helps prevent market failure Sets rules, regulations, laws
What are the disadvantages of a Mixed economy?
Market Failure
Inequality
Problems associated with government intervention
