Free market economies Flashcards
What is an economic system?
It is a network of individuals, organisations and institutions used by society to resolve the basic problem of how, how much, how and from whom to produce
What are the characteristics of a free market economy
- Private ownership of resources
- Owners of resources and producers are free to buy/sell
-Economic agents are motivated by self interest
-Consumers determine what is produced by willing and able to buy goods and services
- Income depends on the market value of an individuals work
- Resources are allocated by the price mechanism
What are the advantages of a free market economy?
- Resources can be bought and sold
- Consumer sovereignty
- Freedom of choice
- Profit motive and self interest incentivises
-Incentive to work harder for higher wages, productivity rises
- Firms face competitive forces which drive down prices
- Incentive to innovate and inves t in new ideas
What are the disadvantages of a free market economy?
- Income / Wealth inequality and poverty
- Market failure can reduce social welfare
- Lack of provision of public goods
- Over provision of goods with negative externalities
- Under provision of goods with positive externalities
- Information gaps may cause market failure
- Unemployment/worker exploitation/ low pay for some
- Resources may be wasted on advertising and marketing
- Firms may develop monopoly power and push up prices
- Macroeconomic instability
What is the invisible hand?
Created by Adam Smith, it is the theory that if economic agents act in their own best interests the forces of demand and supply in the market can promote an efficient allocation of scare sources for society
What did Friedrich Hayek believe in?
He had strong belief in the individual in an economy rather than the government
What is the connection between Keynes and Hayek?
Keynes supported active government intervention to stimulate growth, whereas Hayek did not
