Markets And Economies

Question 1

What is a free market

Answer 1

Allocates resources based on supply and demand and the price mechanism. Anything can be sold at any price that people will pay for it.

Question 2

Advantages of a free market

Answer 2

• Efficiency: as any product can be bought or sold, those of the best value will be in demand- firms are incentivised to be efficient
• Entrepreneurship: the rewards for good ideas can make a lot of money- encourages risk taking and innovation
• Choice: incentives for innovation can lead to an increase in choice for consumers

Question 3

Disadvantages of a free market

Answer 3

• Inequalities: differences in incomes, in a completely free market, people who don’t work receive no income
• Non-profitable goods may not be made: e.g. Rare medical drugs may never sell enough for a firm to make any profit so won’t be made
• Monopolies: this market dominance can be abused

Question 4

What is a command or planned economy

Answer 4

The government decide how resources should be allocated. Communist countries have command economies but they are much rarer since the collapse of communism in the late 20th century.

Question 5

Advantages of a command economy

Answer 5

• Maximise welfare: governments can prevent inequality and redistribute income fairly
• Low unemployment: gov provide everyone a job and salary
• Prevent monopolies

Question 6

Disadvantage of command economies

Answer 6

• Poor decision making: lack of information
• Restricted choice: consumers have a limited choice in what they consume and firms produce
• Lack of risk taking and efficiency: Gov owned firms have no incentive to increase efficiency, take risks or innovate as they don’t need to make profit

Question 7

When does market failure occur

Answer 7

When free markets result in undesirable outcomes e.g traffic congestion

Question 8

What is a mixed economy

Answer 8

When both the government (private sector) and markets (public sector) play a part in allocating resources - most countries