Economics Theme 2 Flashcards
1
Q
What is ‘The Circular flow of Income’?
A
An economic model showing the flow of goods and services and their payments between households and firms within an economy
2
Q
What are ‘Injections’?
Name 3.
A
Money going into the circular flow;
Government (G); spending on public facilities like schools, public infrastructure
Investments (I); People outside the circular flow putting money into firms
Exports (X); Putting outside the circular flow spending money on firms
3
Q
What are ‘Leakages/Withdrawals’?
Name 3
A
Money exiting the circular flow;
Savings (S); (People not continuing the circular flow and giving it to the government
Taxes (T); Income tax, VAT
Imports(M); People spending money on firms outside the country
4
Q
What is ‘The Aggregate Demand’?
A
The total demanded for all goods and services in an economy at any price levels.
5
Q
What is the sum of Aggregate Demand.
A
Consumption (C) + Investment (I) + Government (G) (Exports (X) x Imports (M))
6
Q
What causes a movement along the Aggregate Demand (AD) curve?
A
A change in price
7
Q
What causes a shift in the Aggregate Demand (AD) curve?
A
A change in any of the components of AD;
Consumption (C)
Investments (I)
Exports (X)
Imports (M)
8
Q
What is ‘Aggregate Supply (AS)’?
A
Total value output of the economy, at any given price point and any given time.
9
Q
What causes a shift in a Aggregate Supply curve?
A
The costs of production
10
Q
What causes a movement along the Aggregate Supply curve?
A
Price
11
Q
Why does the Aggregate Supply curve have a sharp slope upwards?
A
When output increases to a certain point, the general price level increases due to businesses needing to work at this output and hire more employees, invest in better machinery, etc.
The general price level is increased as cost of production increases for businesses.
The aggregate supply curve starts to slope as it eventually starts to reach the maximum levels of output.
(Look at some aggregate supply diagrams, if not understood)
12
Q
What is ‘Inflation’?
A
- The ongoing general rise in prices of goods and services over a period of time, leading to a fall in spending power
13
Q
What is ‘Deflation’?
A
- The rate of ongoing general price of goods and services decreasing , but inflation is still occurring.
14
Q
What is ‘Disinflation’?
A
When inflation is still occurring, however the rate of inflation has decreased.
15
Q
What are the two ways The Bank Of England use to measure inflation
A
- Consumer Price Index (CPI)
- Retail Price Index (RPI)
16
Q
What are in these basket of goods?
A
- Clothes
- Groceries
- Subscription prices
- Oil
17
Q
What’d the difference between CPI and RPI
A
While CPI and RPI both measure inflation using a basket of goods, CPI don’t take into account mortgage prices people have to pay.
18
Q
Why do CPI not take into account mortgage prices
A
Not everyone has a mortgage, RPI assumes everyone has a mortgage which can skew the accuracy of the results
19
Q
Name a limitation of using CPI or RPI
A
- They don’t recognize the improvements of quality of goods and services; phones have gone up in price over the years because of how good they have become
- Too much generalization
20
Q
What’s real value
A
Value that takes into account inflation
21
Q
What is ‘Nominal Value’?
A
Value that doesn’t take into account inflation
22
Q
What are the main causes of inflation
A
- Demand pull inflation
- Cost push inflation
23
Q
What is ‘Cost Push Inflation’?
Give an example
A
When prices increase due to cost of production increasing.
e.g. Airplane ticket prices have inflated due to the cost of production for airlines increasing; oil has increased dramatically
24
Q
What is ‘Demand Pull Inflation’?
A
When the prices inflate due to demand increasing.
e.g. 2022 airline tickets prices are so expensive due to there being a lot of demand, this is because only recently people have been able to start going on planes again after COVID
25
What is the definition of 'employment'?
Someone in a paid job
26
What is the definition of 'unemployment'?
People who are willing and able to work, but don't have a job
27
What is the definition of 'underemployment'?
People that want to work full-time but can only find part time work
Skilled workers can only find unskilled jobs
28
What are 2 different ways to measure employment
Claimant Count
Labour force survey
29
What is 'Claimant Count'?
A way to measure employment, it looks at the number of people claiming Job Seeker Allowance
30
What is the 'Labour Force Survey'?
A way to measure employment, it is a quarterly survey of around 60,000 households
31
Name the 4 causes of unemployment
- Occupational employment
- Structural employment
- Geographical immobility
- Technological unemployment
32
What is 'Occupational employment'?
The inability to move from move from one type of job to another
33
What is 'Structural Unemployment'?
The change in tastes and fashion can reduce the demand for certain types of work, leading to people losing jobs in undesired industries
34
What is 'Technological Unemployment'?
When jobs become more automated, labour starts to lose demand. Resulting in job loss for people in undesired (labour intensive) jobs
35
What is 'Geographical immobility'?
The inability of workers to move from one area to another
36
What is 'Deficient Demand'?
The situation when aggregate demand (AD) is less than the aggregate supply (AS) corresponding to full employment level of output in the economy.
37
List the four government policy objectives
- Economic growth
- Low unemployment
- Low and stable inflation
- Balance of payments
38
What is 'Economic Growth'?
and why is it an objective?
Economic growth is the rise in peoples real income,
This is an objective as it is in the governments main focus to help and benefit its citizens
39
What is 'Low Unemployment'?
and why is it an objective?
Low unemployment generally just means most people who are able and willing to work are in a job.
This is an objective as it can stimulate economic growth.
40
What is 'Low and stable Inflation'?
and why is it an objective?
Where the general price of goods stay constant and isn't too high.
If the value of the currency decreases, it can lead to economic decline as AD will decrease.
41
What is 'Balance of Payments'?
and why is it an objective?
Record of economic activities with other countries;
exports > imports = Surplus (as more money entering the economy)
imports > exports = Deficit (as more money is exiting the economy)
42
What are the 3 policies the Government uses for the economy
- Fiscal Policy
- Supply-Side Policies
- Monetary
43
What is 'Fiscal Policy'?
When the government adjusts government spending or taxation to effect AD
44
What is 'Expansionary policy'?
why is it used?
Fiscal policies (such as government spending) to increase spending in the economy, to encourage economic growth.
45
What is 'Contractionary Policy'?
why is it used
Fiscal policies (such as more taxation) to decrease spending within the economy.
used to reduce inflation if the economy is booming
46
What is 'Monetary Policy'?
Controlling the money flow of the economy. This
is done with interest rates and quantitative easing, conducted by the BOE
47
What is 'Supply-side policies'?
Policies which seek to increase the quantity or quality or the factors of production, such as; taxes, benefits, grants and subsidies that affect AS
48
What is the 'base rate/bank rate'?
The main tool for controlling the level of lending in an economy
It's what the Bank Of England charges commercial banks to lend money
49
What is the 'Monetary Policy Committee (MPC)'?
Meets monthly to set the base rate, which is around a 2% CPI
50
What is 'Deregulation'?
the reduction in rules and regulations for businesses
51
What is 'Privatization'?
Changing public sectors into private
52
What are "time lags"?
When policies take some time to take effect
53
What is an 'Interventionist'?
Governmental interference in economic affairs
54
What are 'free market policies'?
Minimal governmental interference
55
What is 'Economies of Scale'?
The benefits a firm receives when the increase in output leads to a fall in average costs per unit
56
What is 'Internal Economies of Scale'?
internal economies of scale refer to the benefits that a firm receives due to its own growth and expansion.
57
What is 'External Economies of Scale'?
The benefits that a firm receives due to the growth and development of an industry in which it operates
58
What is 'Minimum Efficiency Scale'?
Where the optimum level of output is since costs are lowest, and the economies of scale of production have been fully utilised
59
What is 'Market Power'?
Where large firms have more dominance over the market, which allows them to
gain price setting powers and discourage the entrance of new firms.
60
What is 'Competitive Advantage'?
When a firms products are deemed to be better than its competitors by customers.
61
How can a firm gain a competitive advantage
providing more value than its competitors
- lower price
- higher quality
- Customer loyalty
62
What is 'diseconomies of Scale'?
when output passes a certain point and average costs start to increase per
extra unit of output produced
63
Name and explain 3 examples of why diseconomies of scale may occur
Control
- Harder to monitor employees productivity as firm grows
Coordination
- It is harder and complicated to coordination every worker
Communication
- Workers may start to feel alienated and excluded as the firm grows.
64
Name 2 problems arising from growth
Diseconomies of scale
- so much output to a point where every unit produced, average costs rise
Potential skills shortages
- This might lead to higher wages since firms have to compete to attract scarce employees. This is because the demand for labour exceeds supply.
65
What is 'corporate culture'?
and why is it important
Shared values of a firm or workplace
- When employees are happy, they are more likely to be productive and do a good job
66
What is 'Organic Growth'?
This is when firms grow by expanding their production through increasing output
67
What is 'Inorganic Growth'?
Firms growing through mergers and takeovers
68
Name 2 benefits of organic growth
- existing shareholders retain their control over the firm, which might reduce conflicts
- Organic growth is typically financed through a company's existing resources, which reduces financial risk.
69
Name 2 benefits of inorganic growth
- Faster short term growth, meaning competitors won't able to catch up
- Diversification of products can mean spreading risk across wide selection
70
What is 'Vertical Integration'?
when a firm merges with or takes over another firm in the same industry, but a different stage of production.
71
What is 'Forward Vertical Integration'?
when the firm integrates with another firm
closer to the consumer.
- Sony pictures buys a cinema
72
What is 'Backwards Vertical Integration'?
when a firm integrates with a firm closer to the producer.
73
Name 2 advantages of vertical integration
- Economies of scale
- Control over the market
- more certainty over production
74
What is 'Horizontal Integration'?
This is the merger of two firms in the same industry and the same stage of
production.
75
Name 2 advantages of horizontal integration
- Higher market power
- Economies of scale
- Both have same expertise, meaning double the knowledge
76
Name 2 disadvantages of horizontal integration
- Diseconomies of scale
- disagreements in objectives
- Monopoly leads to inefficiency
77
What is ''Conglomerate Integration'?
two unrelated firms merging together.
i.e. eBay and PayPal merging
78
Name 2 advantages of Conglomerate integration
- Both firms can reach wider customer bases
- Economies of scale in terms of risk bearing
- Stronger in their respective markets
79
Name 2 disadvantages of conglomerate integration
- insufficient focus on each range may reduce quality and increase production
costs.
- Diseconomies of scale
80
What is 'Research and Development'?
Investing in research with the intention of improving goods and services and improving methods of production.
81
Difference between product and process innovation
Product innovation
- Creating and bringing a new good or service to the market
Process innovation
- New and improved production
82
What is 'Product life cycle'?
list them in order and explain each stage
The stages that exist in the life of products
Development
- New product is introduced to the market and the demand for the product is low
Growth
- Once accepted, the demand for the product increases, leading to higher revenues for the company. The costs of production may decrease as the company benefits from economies of scale
Maturity
- The market for the product becomes saturated, and the demand for the product begins to level off. The company may need to focus on cost-cutting measures to maintain profitability
Decline
- The product life cycle, sales and revenues decline as the product becomes obsolete or faces stiff competition
83
What is extension and what ways can you achieve it (in relation to product life cycle)
Strategies used by companies to prolong the life of a product before it reaches the decline stage of its life cycle.
Strategies are;
- More advertising
- Adding value by changing colours
84
Name the 2 ways the digital economy has affected market information
Price comparison sites
- reduces asymmetrical information by allowing the consumer to compare different company prices before buying
Social media
- This is a method of marketing where firms cause viewers of a promotion to share it with friends, causing the product to go viral
85
Name 2 ways the digital economy has affected supply side of business
Micromarketing
- Contrasting mass marketing, it is focused at a specific group of people, special offers and voucher
codes, which are aimed towards individuals
Online distribution
- Selling online; eBay, Amazon etc
86
Name 2 ways the digital economy has affected demand side of business
Long tail
- Company focuses on selling a large number of these less popular (niche) items, which can still generate significant revenue due to the collective demand for niche products.
Lower cost of production
- The costs of production and distribution are low and falling as businesses are not restricted by the physical space available in a shop or the costs involved with a shop
Unrestricted geographically
- Access a wider geographical market by selling online rather than in a physical shop
87
Name 2 ways the digital economy has affected markets and firms
Firm creation and destruction
- The increasing popularity of the digital economy has affected how consumers access and consume products. firms such as blockbuster and Toys R Us are gone
Technological change
- the rise of downloadable films, has essentially destroyed the market for VHS video tapes
88
What is 'price elasticity of demand'?
the responsiveness of a change in demand to a change in price
89
What is 'unitary elastic'?
and what is the numerical value
Good has a change in demand which is equal to the change in price
PED is =1 (equal to one)
90
What is 'inelastic'?
and what is the numerical value
Demand that is relatively unresponsive to a change in
price
PED is <1 (less than one)
91
What is 'Elastic'?
and what is the numerical value
very responsive to a change in price
PED is >1 (more than one)
92
What is 'Perfectly Inelastic'?
and what is the numerical value
a demand which does not change when price changes
PED = 0
93
What is 'Perfectly Elastic'?
and what is the numerical value
Demand falls to zero when price changes
PED = infinity
94
Name 3 factors influencing PED
- Necessity of the good
- Substitutes
- Addictiveness
- Proportion of income spent on the good
- Peak and off-peak demand
95
Name 3 ways that small firms can compete in competitive markets
- Unique selling points
- Good relationship with stakeholders
- Not experiencing diseconomies of scale
- Small firms as monopolists; provide great customer service
96
Name the 3 non price competition methods
- Product differentiation
- Advertising
- Distribution methods
97
What is 'Income elasticity of demand'?
The responsiveness of a change in demand to a
change in income
98
What is an 'inferior good'?
and its numerical value
Those which see a fall in demand as income increases
YED < 0
99
What is an 'Necessary/normal good'?
and its numerical value
demand increases as income increases
YED = >0
100
What does it mean if YED = 0
demand for the product does not change when incomes change
101
What is 'Productivity'?
output per unit of input per period of time.
102
Using the exact definition of productivity, what does it mean to be more productive?
More output with the same inputs
i.e. Same number of workers (input) produce more (output) in the same time period (input)
103
What is 'Labour Productivity'?
Output per worker per hour
104
Name 2 factors influencing productivity levels
- More advanced capital machinery
- Investment in their education, training
- More incentives
- Process innovation
105
Describe the between productivity and competitiveness
If the average costs of production are high, the business will have to charge high prices in order to cover their costs. This makes them less competitive against other firms, who can charge lower prices, (and vice versa)
106
What is 'Labour Intensive'?
and why does it occur?
Firms that rely on labour more than capital.
this occurs when there is a large supply of labour and low costing compared to capital intensive work
107
What is 'Capital intensive'?
and why does it occur
Firms that rely on capital more than labour
this occurs when capital is cheaper to access than labour
108
What is 'Capacity Utilisation'?
used to measure productive efficiency
109
Why do firms operate at under capacity utilisation
- Changes in the level of demand in the economy
- Operating at full (or near to) capacity could mean that quality is affected due to a rushed production process
- The firm has more flexibility to change its level of output as and when it is needed
110
What is 'Lean Production'?
and name 2 things it achieves
The process of minimising waste during the stages of
production
- Eliminating waste
- Create a culture of continuous improvement
- Meet customer requirements
111
What is 'Quality Control'?
The process of checking products to ensure they meet a minimum standard
112
What is 'Quality Assurance'?
The maintenance of a desired level of quality in a service or product, by means of attention to every stage of the process of delivery or production.
- Thus replaces [QC] the need to monitor output and check the quality of a finished product
113
What is 'TQM'?
Every team involved in production is considered to have
responsibility for quality
114
What is 'Kaizen'?
and name 2 things it can achieve
Continuous improvement; an approach which involves introducing small alterations in a business with the aim of improving quality and efficiency
- reducing waste
- Increasing Productivity
- Worker responsibility
115
What is 'Just In Time'?
name 2 things it achieves
JIT is a method which ensures inputs to the production process only come as and when they are required, based upon consumer demand.
- Reduces cost of holding stock
- Reduces waste
116
Name 2 advantages of JIT
- The firm will be holding less stock, which costs the firm less to store
- With less stock, it is less likely to perish or become obsolete
- Since only as much stock as is needed is stored, the firm allocates less working capital to stock
117
Name 2 disadvantages of JIT
- Requires extremely responsive suppliers
- The firm is not flexible enough to meet unexpected orders, since everything is made as it is needed, with no extras
-The firm cannot afford to make mistakes in the production, since the amount of stock held is kept to a minimum
-
118
Name 2 advantages of productive efficiency
- Increasing productivity results in a fall in average costs for the firm
- Being more efficient will result in a reduction in waste
- Reduced lead time
119
What is 'Lead Time'?
the time delay between a decision being made and the decision being carried out.
120
What is 'Globalisation'?
The process of increased interconnectedness between nations, due to the increase in trade.
121
Name and briefly explain 3 factors contributing to globalisation
Trading goods
- MNCs moving production to developing countries for to cheap labour, causes developed countries to trade with these developing countries
Trading services
- For example, the trade of tourism, call centre services, and software production
Trade liberalisation
- Reduction of trade barriers due to organisation like the WTO who advocate for free trade
MNCs
- organisations which own or control the production of goods and services in multiple countries.
International financial flows
- the flow of capital and FDI across international borders has increased, foreign ownership of firms has increased like Saudi Public Investment Fund acquiring Newcastle
Fall of communism
- Fall in communism has meant more developing countries are participating in world trade
122
Name and explain 2 limitations of GDP per capita
- Does not give any indication of the distribution of income. Therefore, two
countries with similar GDPs per capita may have different distributions which lead to
different living standards in the country
- GDP may need to be recalculated in terms of purchasing power, so that it can
account for international price differences.
- There are also large hidden economies, such as the black market, which are not
accounted for in GDP. This can make GDP comparisons misleading and difficult to
compare
123
Name and explain 3 indicators of growth
GDP per capita
- GDP divided by population, shows how much everyone averagely has
Literacy levels and life expectancy
- Low literacy is the proportion of adults are literate and high life expectancy shows good quality healthcare
HDI
- Uses education, standard of living and life expectancy
- Close to 1 is indicative of a high level of economic development. Close to 0 suggests a low level of development
124
Name 3 advantages of specialisation
- Focus on one aspect can result in higher quality and output
- There could be a greater variety of goods and services produced
- more opportunities for economies of scale, so the size of the market increases.
- There is more competition and this gives an incentive for firms to lower their costs
125
Name 3 disadvantages of specialisation
- Work becomes repetitive, which could lower the motivation of workers
- There could be more structural unemployment, since skills might not be
transferable
- Varity may decrease, if focus is put on one thing
126
Name 3 benefits of trading blocs
- Reduced transportation costs due to no border control
- Firms can take advantage of a larger potential market in which to trade resulting in economies of scale
- Enhanced competition results in more efficiency
- More of a workforce due to ease of migration
127
What is 'Devaluation' in relation to exchange rates
When the value of a currency is officially lowered in a fixed exchange rate system.
128
What is 'revaluation' in relation to exchange rates
the currency’s value is adjusted relative to a baseline, such as the price of gold, another currency
129
What is the 'effective exchange rate (EER)'
Index describes the strength of one currency to a basket of other currencies using an index
130
Name the 4 stages in the economic cycle
- Boom
- Recession
- Slump
- Recovery
131
In the economic cycle, what is boom?
- and name 3 characteristics
When economic growth is fast and unsustainable (inflationary)
- High rates of economic growth
- Near full capacity
- (Near) full employment
- Demand-pull inflation
- High confidence (high investment)
- High gov funds due to tax and less spent on
132
In the economic cycle, what is a recession?
- and name 3 characteristics
Negative economic growth over two consecutive
quarters:
- Negative economic growth
- Lots of spare capacity
- Demand-deficient unemployment
- Low inflation rates
- Government budgets worsen due to more spending on welfare payments and lower tax revenues
- Less confidence amongst consumers and firms, which leads to less spending and investment
133
Name the 2 things that influence consumer spending
- Interest rates
- Consumer confidence
134
Name 3 things that influence capital investment
- Rate of economic growth
- Business expectation
- Demand for exports
- Interest rates
- influence of government regulation
135
Name one thing that influences government spending
- Economic growth
- Fiscal policy
136
Name 3 things that influence Exports - Imports
- Income
- Exchange rates
- State of world economies
- Protectionism
- Competitivity of a countries goods and services
137
Explain how CPI measures inflation
- Measures household purchasing power with a survey that researches what consumers spend their money on
- From this, a basket of goods are created, where items weigh depending on how much is spent on
- Then measures are made to the average price change of the goods
- this is updated yearly
138
Name 2 limitations to CPI
- Different demographics have different spending patterns
- It is hard to make historical comparisons, since technology
twenty years ago was of a vastly different quality, and arguably a different product altogether,
- Housing costs account for about 16% of the index, yet this varies between people
- It is represented for the average household, some people don't own cars
139
Name 2 impacts on firms if inflation occurs
- Firms are less likely to invest as the cost of borrowing will be higher as interest rates are higher
- Workers might demand higher wages, thus costs of production will increase
- Firms will be less internationally competitive
- Unpredictable inflation will reduce business confidence
140
Name an impact on employees if inflation occurs
- Less disposable income as real income will decreases
- Redundancies
141
Name an impact on consumers if inflation occurs
- Value of debts will be lower
- Less disposable income as real income has decreased
142
Name an impact of unemployment on consumers
- Less disposable income
- Lower standard of living
143
Name an impact of unemployment on firms
- Larger supply of labour to employ from, thus lowered wages
- Profits will fall
- firms that sell inferior goods will benefit
144
Name an impact of unemployment on society
negative externalities such as crime
145
Name 3 limitations to fiscal policy
- Governments might have imperfect information about the economy. It could lead to inefficient spending.
- There is a significant time lag involved with employing fiscal policy, it could take months, or years to take effect
- If interest rates are high, fiscal policy might not be effective for increasing demand
- If the government spends too much, there could be difficulties paying back the debt, which could make it difficult to borrow in the future
146
What are the two instruments of monetary policy?
- Interest rates
- Quantitative Easing
147
What is 'Quantitative Easing'?
A monetary policy instrument that is used when lowering interest rate no longer effective in stimulating the economy.
- The central bank will buy government bonds or financial assets from commercial banks, and essentially increase the supply of money in the financial system
- It allows banks to have a higher supply of money, and thus be able to lend money to individuals or businesses
- Due to the higher supply of money, interest rates are expected to drop, so borrowing will increase, thus will jump start the economy.
148
Name 2 drawbacks of monetary policy
- Commercial banks may not pass bank rate onto consumers, thus the intended effect may not occur
- Even if the cost of borrowing is low, consumers might be unable to borrow because banks are unwilling to lend, like in the 2008 crisis where banks were risk averse
- If consumers think the economy is still risky, they are less likely to spend, even if interest rates are low
149
Name and explain 5 supply side policy examples
Education and training
- The government could subsidise training or spend more on education, thus lowering cost of production for firms, increasing output
Reforming tax
- By reducing income and corporation tax, governments could encourage spending and investment.
- Tax reforms could encourage more people to work, and benefits could be more stringent.
Improving labour market flexibility
- Governments could try and improve the geographical mobility of labour by subsidising the relocation of workers
Immigration
- Migration can fill skills gaps and reduce the unemployment rate
Privatisation and deregulation
- Could make more firms compete, increasing efficiency
Infrastructure development
- improving roads and schools. This could make transport more efficient
Research and development incentives
- This can encourage more investment, which can benefit the economy in the long run by helping firms find more efficient methods of production and innovating
Subsidies
- These could be directed towards small businesses to encourage them to expand, or to lower training costs for firms.
150
Name a drawback of supply side policies
- Time lags
- Reducing the rate of tax, could lead to a more
unequal distribution of wealth
151
Name 5 reasons why exchange rates can change
- Inflation; low inflation means more exports = appreciation
- Interest rates; high rates may mean more investments
- Speculation; hype may cause investment in the currency
- Government finances; confidence in the economy/currency
- Balance of payments; if imports exceed exports
- International competitiveness; may increase exports
- Government intervention; fixed exchange rate
- Quantitative easing; inflation decreases value of currency
152
What is ' negative output gap'?
the actual level of output is less than the potential level of output. This puts downward pressure on inflation.
153
What is 'positive output gap'?
When the actual level of output is greater than the
potential level of output. It puts upwards pressure on inflation.
154
Name 3 conflict issues the government will have to fact when managing the macro economy
- Potential policy conflicts and trade-offs
- Environment vs competitiveness; If ‘green taxes’ are implemented, competitivity of domestic firms could be compromised
- Fiscal vs monetary policy; fiscal policies involve more government borrowing, which could cause interest rates and the inflation rate to rise
- Interest rate vs inequality; The low interest rate could affect the distribution of income. Savers only receive a small return on their savings
- Progressive taxes vs inflation; could increase inflation
155
What is 'laissez-faire economies'?
and name 2 pros and cons
Literally translates to "let them do". The government doesn't interfere much in the economy, with little to none regulations
pros:
- Firms are likely to be efficient, and not be constrained by any rules
- The bureaucracy (paperwork and stuff) from government intervention is avoided.
- More personal freedom
cons:
- The free market ignores inequality, and tends to benefit those who hold most of the wealth
- There could be monopolies = x-inefficiency
- Public goods are not provided in a free market
- There could be the overconsumption of demerit goods,
156
What is 'Command economy'?
and name 2 pros and cons
This is where the government allocates all of the scarce resources in an economy to where they think there is a greater need
pros:
- Easier to coordinate resources in times of crises
- Ensure everyone can access basic necessities
- Inequality in society could be reduced
- The abuse of monopoly power could be prevented
cons:
- Governments may not be fully informed for what to produce
- may not necessarily meet consumer preferences
- It limits democracy and personal freedom
157
What is a 'Mixed economy'?
This has features of both command and free economies and is the most common economic system today.
