LS6 - Economic Systems Flashcards
What is planning according to economics?
Planning reefers to the process by which a government allocates resources. This is funded through taxation.
What is a market?
A market is anywhere buyers and sellers exchange goods and services. This can be physical or digital
What is the price mechanism?
The process by which the market allocates resources
What is the relationship between price, supply, and quantity?
As price increases, supply increases and likewise. This causes quantity to increase as supply increases too
What is the relationship between price, demand, and quantity?
As price decreases, the demand increases, and so quantity increases
What is the point where the supply and demand lines cross?
This is called the intersection and is where a free market is at equilibrium
What is a command economy?
Command economy is an economy in which resources are allocated solely by the state
What is a mixed economy?
A mixed economy is that in which resources are allocated by the state and the price mechanism. This is because it consists of the public and private sector
What is a free market economy?
A free market economy is an economy in which resources are allocated solely by the price mechanism of the private sector so that supply and demand determines most
What countries best exemplify each economy?
Command economy: China
Mixed economy: UK
Free market economy: USA
What is the public sector?
The public sector is the part of the economy which is controlled or owned by the government
What is the private sector?
The private sector is the part of an economy which is not controlled or owned by the government. Individuals or groups seeking to profit maximise make up the private sector
What is the profit motive?
Profit motive is the aim of firms to maximise profit margins by maximising revenue and minimising costs
What does the profit motive result in?
The profit motive leads to wider choice because this incentivises firms to develop new products (invention) and firms to meet consumer demand (market research/innovation)
How big is the profit motive in command economies? Why is this? Consequence?
The profit motive is absent in command economies as the government decides and the firms are told what to produce. This can lead to limited choice
Why may free markets and mixed economies have limited choice?
Concentrated market and monopolies can limit choice in free market and mixed economies
What is a concentrated market?
Where there is a few large sellers that dominate the market: Supermarkets, Soft Drinks, Airlines
What is a monopoly?
By law, if 25% or more of the market is owned by a firm in the market are called a legal monopoly. If this becomes larger, then it is a natural monopoly where there is one supplier. A pure monopoly is where there is one that has the entire market
Why is quality and innovation higher in a mixed and free market economy?
This is because both competition and the profit motive are present in these types of economy
What is efficiency?
Efficiency is concerned with the optimal production and distribution of these scarce resources
Why are mixed and free economies more efficient than command economies?
Command economies lack competition and the profit motive
Why do free markets and mixed economies have a less equitable distribution of income and wealth than command economies?
This is because the owners of capital and land accumulate wealth over time and pass privilege on to their children through property, private education and social networks
Do command economies lack equitability?
Sometimes command economies lack equitability in terms of opportunity and access to public services
How does private ownership of capital and land result in unequal distribution of income and wealth?
Capital and land rises in value increasing the return, wealth, and distribution of income
Why does inequality still tend to be a problem in command economies?
Governments switch between command and free as they lose interest
Governments regain a profit motive
