Free Market economies, mixed economy and command economy (1.1.6) Flashcards
1.1.1. Economics as a social science, 1.1.2. Positive and Normative Statements, 1.1.3. The Economic Problem, 1.1.4. Production Possibility Frontiers, 1.1.5. Specialisaion and Division of Labour, 1.1.6. Types of Economies
What are the three types of economies?
Free Market Economy, Command Market Economy and Mixed Market Economy
Define a free market economy
No government intervention or little used. A type of economic system where the forces of supply and demand are used to allocate scarce resources between alternative uses. Price of Goods and Services is determined by Supply and Demand expressed by sellers and buyers.
What are the Advantages of a Free Market Economy?
-Price is a good indicator of how to allocate resources
-Lower prices due to competition
-Competition drives firms to produce what consumers want
-Competition drives new, innovative goods and services
What are the Disadvantages of a Free Market Economy?
-Income and wealth inequality will increase
-Public Parks wont be developed or maintained
-Necessities may be underproduced (healthcare, education)
-Dangerous products might be underpriced (alcohol, tobacco)
-Lower environmental responsibility increasing pollution
What are some key characteristics of a Free Market Economy?
-Freedom to trade internationally
-Limited Market intervention
-Small Size Government
-Low Tax environment
-Consumer preferences determine resources allocation
Define a command economy
Lots of Government intervention. A type of economic system where the state owns and allocates scarce resources between alternative uses. Its a key feature of a Communist Society.
What are the Advantages of a Command Market Economy?
-Government set wages and own all land so no inequality
-Necessities like healthcare and education provided for everyone
-Unhealthy/harmful products limited or prohibited
What are the Disadvantages of a Command Market Economy?
-No Price signals to know what to produce
-No profit motive to take risks and innovate
-No profit motives to improve efficiency
-No profit motive leading to less choice for customers
Define a Mixed Market Economy?
Some Government intervention. Some resources are owned by the public and some are owned by a private sector. Nearly all economies are mixed. Both will combine to allocate all resources in an economy. Governments intervene in Private sector.
What are the Advantages of a Mixed Market Economy?
-Provides capital through the promotion of innovation
-Permits spending in systems that a pure capitalist economy would neglect
-Provides goods or services whenever they’re required
-Protects the general wellbeing of the population
-Provides an equal level of economic control within society
What are the Disadvantages of a Mixed Market Economy?
-Common corruption and kickbacks
-Lack of market equilibrium
-Lengthy decision-making processes
-Overgrowth or undergrowth of the private sector
-Creation of private businesses which could disrupt the economy
Explain the role of the government in a mixed economy
-Creating framework for rules
-Supplements and modifies the price system
-Redistributes income
-Stabilizes the economy
Define Privatization
Private sector firms take over an industry originally ran by the government. Allowing private sector firms to run the industry with the profit motive
Define Nationalism
The government take over an industry originally ran by private sector firms. Allowing the government to run the industry in the best interest of the consumers
What are the Advantages and Disadvantages of Government intervention?
Advantages:
-Provide Public Goods (Parks)
-Provide Merit Goods (Education)
-Reduce Inequality
-Government Regulations can Protect environment
Disadvantages:
-Government Failures
-Lack of incentives to be efficient in Public Sector
-Income Tax
-Welfare
-Less Choices in Government ownership
What’s a Market?
Anywhere a buyer and seller come together to transact. Don’t have to be in the same place could be online.
What are Sub-Markets?
The Market for most goods and services can be broken down into sub-markets which tailor to different needs and wants of consumers.
What’s an example of a Sub-Market?
E.g. Car Market would be sub-marketed into electric and hybrid vehicles
Who was Karl Marx? What did he say about Adam Smith’s ideas?
He developed many of Adam Smith’s ideas on Capitalism/free market economies but mostly considered them to be a negative impact. He agreed it would lead to an increase in productivity but said that the labour impact would be terrible.
What’s a Transition Economy?
An economy that is involved in a process of moving from a command economy to a mixed or free market economy.
Out of these 3 economists which wanted a free market economy, Mixed economy + Command Economy?
Friedrich Hayek, Karl Marx, Adam Smith
Friedrich Hayek- Mixed Economy
Karl Marx-Command Economy
Adam Smith- Free Market Economy
