Economic Systems and thinkers

Question 1

We already know that Adam Smith came up with:

Answer 1

Specialisation and the division of labour

Question 2

As consumers bid up the price, the rising price will:

Answer 2

The rising price will ration how much consumers can buy, while incentivising and signalling to producers to supply more.

Question 3

Free market economy

Answer 3

An economy where all resources are allocated by the price mechanism. There’s NO government intervention.

E.g. Hong Kong in 1960s is a close example

Question 4

Command economy

Answer 4

An economy where all resources are allocated by the government.

E.g. Cuba or North Korea in the 1980s

Question 5

Mixed economy

Answer 5

An economy where some resources are allocated by the price mechanism, and some are allocated by the government.

E.g. the UK

Question 6

Adam Smith

Answer 6

Smith described the price mechanism as an “invisible hand”.

He argued that free markets were very efficient and that the government should only intervene in cases of market failure (e.g. externalities).

Question 7

Karl Marx

Answer 7

Marx argued that free markets would lead to capitalism and inequality.

Capital owners would make huge profits, but workers would be paid low wages.

So Marx supported command economies, where a government can fairly allocate resources between everyone.

Question 8

Hayek

Answer 8

Friedrich Hayek described the price mechanism as a “communication network”.

Changing prices told producers what consumers wanted and what they didn’t want, eliminating excess supply and demand.

Hayek criticised Marx’s ideas for a command economy. Hayek argued that a government would not have enough information to work out how to allocate resources effectively.