Free market, mixed and command economies Flashcards
What is 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 main characteristics of free market economies?
Private ownership of resources
Market forces determine prices
Producers aim to maximise profits
Consumers aim to maximise utility
Resources are allocated by the price mechanism
Who were the 2 economists in favour of free market economies?
Adam Smith and Friedrich Hayek
What is a command economy?
It is an economy in which resources are allocated by the state
What are the characteristics of a command economy?
There is a state ownership of resources
A state determines price
Producers aim to meet production targets set by the state
The state allocates resources
There is a greater income equality than in a free market
Who was in favour of a command economy?
Karl Marx
What is a mixed economy?
It is a combination of a free market economy and a command economy
What are the advantages of free market economies?
Consumer sovereignty
Responds quick to changes in wants
No bureaucracy
Competition and profit act as an incentive for efficient allocation of resources
Increased choice
Economic and political freedom
What are the disadvantages of free market economies?
Inequality
Trade cycles (instability in form of booms and slumps)
Imperfect information
Monopolies
Externalities
What are the advantages of command economies?
Greater equality
Macroeconomic stability
External benefits and external costs
No exploitation
Full employment
Resources may be allocated by the state to maximise social welfare
What are the disadvantages of command economies?
Inefficiency because of the absence of profit and competition
Lack of incentives to take risks
Restrictions on the freedom of choice
Shortages and surpluses
Bureaucracy
No consumer sovreignty
Inflexibility (slow to respond to changes)
What is the role of the state in a mixed economy?
defence or internal security
provision of public goods
provision of public services such as education or health
redistribution from rich to the poor
What is utility?
Refers to the level of statisfaction a consumer recieves from the consumption of a product or a service.
Consumers aim to maximise their utility.
Producers aim to maximise profits.
