Free Market Economy Flashcards
(6 cards)
What is a free market economy?
An economic system in which prices are determined by supply and demand with no government intervention
What are the characteristics of free market economies?
+ There is private ownership of resources.
+ Market forces, 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 is Adam Smith’s take on free market economies?
-suggested that when individuals follow their own interest,they indirectly promote the good of society
—the free market would result in an ordered market with producers responding to changes in consumer wants in such a way that there was little waste.
-believed that the role of the government should be limited to providing defence, justice and some public goods such as roads.
What is Friedrich Hayek’s take on free market economies?
Strong defence of the free market along with the support of private property
-Attempts by the government to determine the answers to the questions of what to produce, how to produce and for whom were doomed for failure.
-State planning would involve restrictions o freedom and the use of force.
What are the advantages of free market economies?
Consumer sovereignty: this implies that consumer spending decisions determine what is produced.
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 or if there is asymmetric 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.
Externalities: these are costs and benefits to third parties that are not taken into account when goods are produced and consumed.
