Free Market economies, mixed economy and command economy (1.1.6)

Question 1

What are the three types of economies?

Answer 1

Free Market Economy, Command Market Economy and Mixed Market Economy

Question 2

Define a free market economy

Answer 2

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.

Question 3

What are the Advantages of a Free Market Economy?

Answer 3

-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

Question 4

What are the Disadvantages of a Free Market Economy?

Answer 4

-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

Question 5

What are some key characteristics of a Free Market Economy?

Answer 5

-Freedom to trade internationally
-Limited Market intervention
-Small Size Government
-Low Tax environment
-Consumer preferences determine resources allocation

Question 6

Define a command economy

Answer 6

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.

Question 7

What are the Advantages of a Command Market Economy?

Answer 7

-Government set wages and own all land so no inequality
-Necessities like healthcare and education provided for everyone
-Unhealthy/harmful products limited or prohibited

Question 8

What are the Disadvantages of a Command Market Economy?

Answer 8

-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

Question 9

Define a Mixed Market Economy?

Answer 9

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.

Question 10

What are the Advantages of a Mixed Market Economy?

Answer 10

-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

Question 11

What are the Disadvantages of a Mixed Market Economy?

Answer 11

-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

Question 12

Explain the role of the government in a mixed economy

Answer 12

-Creating framework for rules
-Supplements and modifies the price system
-Redistributes income
-Stabilizes the economy

Question 13

Define Privatization

Answer 13

Private sector firms take over an industry originally ran by the government. Allowing private sector firms to run the industry with the profit motive

Question 14

Define Nationalism

Answer 14

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

Question 15

What are the Advantages and Disadvantages of Government intervention?

Answer 15

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

Question 16

What’s a Market?

Answer 16

Anywhere a buyer and seller come together to transact. Don’t have to be in the same place could be online.

Question 17

What are Sub-Markets?

Answer 17

The Market for most goods and services can be broken down into sub-markets which tailor to different needs and wants of consumers.

Question 18

What’s an example of a Sub-Market?

Answer 18

E.g. Car Market would be sub-marketed into electric and hybrid vehicles

Question 19

Who was Karl Marx? What did he say about Adam Smith’s ideas?

Answer 19

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.

Question 20

What’s a Transition Economy?

Answer 20

An economy that is involved in a process of moving from a command economy to a mixed or free market economy.

Question 21

Out of these 3 economists which wanted a free market economy, Mixed economy + Command Economy?
Friedrich Hayek, Karl Marx, Adam Smith

Answer 21

Friedrich Hayek- Mixed Economy
Karl Marx-Command Economy
Adam Smith- Free Market Economy