free market economies Flashcards
free market economy
refers to an economic system where the prices of goods and services are set without government interference
who belived in the free market economy
Adam Smith
who believed in the command economy
Karl Marx
who beleived that free markets were better than command economies
Friedrich Hayek
he believed that the poor in free market (or freer market) countries were better off than those in command economies because at least they had personal freedom
What is the command market economy
- all factors of production, except labour, is owned by the state and labour is directed by the state.
- There is no private property and everyone is assumed to be selfless, working for a common good.
- no matter their job, tend to receive the same wage, products are standardised and prices are limited causing excess demand and queueing.
advantages of a free market economy
- Consumers have freedom of choice, called consumer sovereignty.
- There is high motivation as people know working hard could lead to high potential
rewards, creating conditions where initiative and enterprise flourish. - In general, freer market economies tend to have higher growth.
disadvantages of a free market
- There tends to be high levels of inequality, since the rich own more factors of production and so can grow richer.
- There is the problem of externalities.
- Resources could be wasted on unproductive expenses such as advertising, switching the factors of production and providing competitive services.
advantages of a command economy
- The state provides a minimum standard of living, ensuring no one is extremely poor as there is less inequality.
- There is less wastage of resources as there is no need for competitive services nor advertising, which is very expensive.
disadvantages of a command economy
- It is impossible for the state to make so many decisions correctly, which could lead to over or under supply and a waste of resources.
- Decision making will be slow as it has to go through various stages and there could be an increase in bribery and corruption (an increase in bureaucracy).
- As everyone receives the same wage, there is less motivation and efficiency because people know that working harder will not increase their standard of living.
- Consumers lose their freedom and it is often led by dictators.
what is a mixed economy
an economy where both the free market mechanism and the government planning process allocate a significant amount of the total resources in the country
role of the mixed economy
- creating frameworks and rules to prevent the abuse of monopolies
- Supplements and modifies the price system: They produce public and merit goods, such as emergency services and transport, and limit the production of demerit goods like tobacco
how are resources in a free market allocated
- resources are allocated via a price mechanism
- if there is an increase in demand, prices rise to raation the good
definition of market failiour
when the price mechanism leads to a misallocation of resources
