Free Market Economies, Mixed Economy And Command Economy Flashcards
What is a free market economy?
A free market economy refers to an economic system in which prices are determined by supply and demand with no government intervention.
What are the characteristics of a free market economy?
✚ There is private ownership of resources.
✚ Marketforces, i.e.supply and demand, determine prices.
✚ Producers aim to maximise profits.
✚ Consumers aim to maximise utility (satisfaction).
✚ Resources are allocated by the price mechanism.
What did Adam smith say about the free market economy?
Consequently,the free market economy would result in an ordered market with producers responding to changes in consumer wants in such a way that there was little waste.
✚ Smith believed that the role of the government should be limited to providing defence, justice and some ‘public goods’ such as roads.
What did Friedrich Hayek say about the free market economy?
He argued in his book The Road to Serfdom that attempts by governments to determine the answers to the questions of what to produce, how to produce and for whom were doomed to failure.
What is a command economy?
A command economy is one in which resources are allocated by the state.
What are the characteristics of a command economy?
- There is public (state) ownership of resources.
✚ The state determines price.
✚ Producers aim to meet production targets set by the state.
✚ The state allocates resources.
✚ There is greater equality of income and wealth than in a free market economy.
What did Karl Marx say about command economy?
Karl Marx thought that capitalism was inherently unstable because workers are exploited by the bourgeoisie (the owners of the factors of production).
✚ Ultimately,there would be a proletariat revolution in which communism would result.
What is a mixed economy?
A mixed economy is a combination of a free market economy and a command economy.
How are resources allocated in a mixed economy??
In mixed economies ,some resources are allocated by the price mechanism while others are allocated by the state. What differs between countries is the degree of that mix.
What are the advantages of free market economies?
Flexibility: the free market system can respond quickly to changes in consumer wants.
No bureaucracy: officials are not needed to allocate resources.
Efficiency: competition and the profit motive help to promote an efficient allocation of resources.
Increased choice: consumers have a wide choice of goods and services compared with a command economy.
Economic and political freedom: consumers and producers have the right to own resources
What are the disadvantages of free market economies?
Inequality: those who own resources are likely to become richer than those who do not own resources.
Trade cycles: free market economies may suffer from instability in the form of booms and slumps.
Imperfect information: consumers may be unable to make rational choices if they have inadequate information
Monopolies: there is a danger that a firm may become the sole supplier of a product and then exploit consumers by charging prices higher than the free market equilibrium.
What are the advantages of command economies?
Greater equality: the state can ensure that everyone can enjoy a minimum standard of living and that no one is extremely rich.
Macroeconomic stability: the state can ensure that booms and slumps are smoothed out.
External benefits and external costs: these may be taken into account when planning production.
No exploitation: privately owned monopolies are unable to exploit workers and consumers.
Full employment: the state can ensure that all workers are employed.
What are the disadvantages of command economies?
Inefficiency: the absence of the profit motive and competition may result in an inefficient allocation of resources.
Lack of incentives to take risks: again, the absence of the profit motive may reduce incentives for investment.
Restrictions on freedom of choice: people would be directed into the jobs the state deems necessary.
No consumer sovereignty: decisions by the state rather than consumers determine what is produced.
Inflexibility: the state may be slow to react to changes in consumer needs.
What is the role of the state in a mixed economy?
✚ Defence and internal security
✚ Provision of public goods
✚ Provision of public services such as education and health
✚ Redistribution from the rich to the poor
