Markets And Economies

Question 1

What are markets

Answer 1

They are methods of allocating scarce resources.

Markets are a way of allocating resources, they dont have to be a place or involve the exchange of physical objects.

Question 2

What are two things an economist would assume in a free market.

And what does this lead to

Answer 2

Since in a free market everyone is considered to be rational,

The workers would prefer to have their wages, but less free time.

The employer would prefer to have less money, and to know that there’s someone there to do some work.

Exchanging things in this way eventually results in a particular allocation of resources.

Question 3

Mixed economies

Answer 3

Combine free markets and government intervention.

Question 4

Pros of a free market economy

Answer 4

Efficiency any product can be bought and sold, only those with best value will be in demand. Firms have incentive to make goods in as efficient a way as possible.

Entrepreneurship rewards for good ideas can make entrepreneurs a lot of money. Encourages risk taking and innovation.

Choice increase in incentive increases choice for customers (people aren’t restricted from buying only what true government recommends.

Question 5

Cons of free market economy. 3 things

Answer 5

inequality - lead to huge differences in income. people think unfair. if can’t work even if not your fault receive no income.

non profitable goods may not be made - example drugs to treat rare medical conditions.

monopolies - only suppliers of one product. this market dominance can be abused.

Question 6

command economy

Answer 6

its the government that decides how resources should be allocated.

Question 7

pros of command economy. 3 things

Answer 7

maximise welfare - gov can prevent inequality and redistribute income fairly. ensure production of goods beneficial to society.

Low unemployment - gov can try provide everyone with job and salary.

prevent monopolies - market dominance can be prevented by the gov.

Question 8

cons of command economy. 3 things

Answer 8

poor decision making - lack of info gov make poor and slow decisions about what needs to be produced.

restricted choice - limited choice in what can consume, firms make what told to make.

lack of risk taking and efficiency - gov owned firms no incentive to increase efficiency, take risks or innovate. as no need to make profit

Question 9

market failure

Answer 9

when free market results in undesirable consequences.

gov intervene and create incentive to influence peoples behaviours. or by buying or providing goods or services.

Question 10

public sector

Answer 10

this is the government

Question 11

private sector

Answer 11

businesses that are privately owned.

Question 12

pure free market economy

Answer 12

no public sector

Question 13

pure command economy

Answer 13

no private sector

Question 14

Alex Smith

Answer 14

shaped traditional economics theory. believer in the free market. described how invisible hand allocates resources in societies best interests.

consumers and producers motivated by self interest. consumers motivated to maximise own benefits producers motivated to maximise profit.

in free market consumers demand and producers supply price levels set at point which benefits both.

in order for free market to work properly can’t be monopolies have to have low barriers of entry to maximise competition.

Question 15

Karl Marx

Answer 15

critical of free market created situation where small ruling class of producers dominated and exploited the larger working class wage earners.

profit maximising producers would exploit workers paying low wages and giving few rights until revolution. lead to workers controlling production and everyone having a share of ownership of the resources.

lead to rise of communism in 20th century. many communist countries collapsed. discrediting communism and command economies.

Question 16

Friedrich Hayek

Answer 16

keen supporter of free markets and critic of command economies. gov shouldn’t intervene to allocate resources as Govs lack info required to allocate resources most efficiently.

Individual consumers and producers have best knowledge of what want or need. allocation of resources left to them and price mechanism.

price mechanism is way for producers to communicate (price acts as a signalling device between consumers and producers). forces of supply and demand would show what both consumers and producers want and will naturally allocate resources in a much more efficient way than governments can.