MICRO - LS6 - Types Of Economy

Question 1

Planning definition

Answer 1

The process in which a government allocated resources - this is funded through taxation

Question 2

Market definition

Answer 2

Anywhere buyers/sellers exchange goods/services - can be physically or digitally

Question 3

What do government do

Answer 3

• plan what to produce e.g education /Park/army etc…
• plan how to produce it e.g. who they outsource it to/who they offer services to
• produce for consumers

Question 4

What do producers do

Answer 4

Use price mechanism to decide what to produce and how to do so
Produce for target market

Question 5

What do consumers do

Answer 5

Don’t decide what/how/who to produce for
Will buy things based on price mechanism

Question 6

3 types of economy

Answer 6

Free market
Command
Mixed

Question 7

Free market economy (also known as lassiez-faire, market, capitalist economy)

Answer 7

An economy in which resources are solely allocated by the price mechanism (private sector)

Has:
- Limited role for gov - restricted to protecting property rights of people/businesses through legal system and real value of money by keeping inflation low
- little/no regulation
- aims to maximise profit so consumer preference demands allocates resources
- high quality of goods and competition
- no surplus of goods
- private ownership of resources

Question 8

Private sector

Answer 8

Part of an economy that’s not controlled by government

Question 9

Example of free market economy

Answer 9

• not really one but closed would be US

Question 10

Advantages of free market economy

Answer 10

• profit motive leads to range of choices of products - incentivises firms to develop new products to meet consumer demand - freedom of choice
• buy & sell resources
• efficient - maximises resources to maximise profit
• higher quality and innovation as there are rewards - profit motive and competition (want more customers)
• incentive to workers to work harder for higher wages, encourages productivity

Question 11

Disadvantages of free market economy

Answer 11

• less equal wealth and income - owners of capital and land accumulate wealth over time which is passed to kids
• may not make non-profitable goods e.g. medicine for rare conditions (won’t seek enough for profit)
• can cause concentrated markets and monopolies which can be abused (e.g. coca-cola and Pepsi dominate market)
• disregulated markets lead to instability
• under providing ‘merit goods’ - many can’t afford them lowering social welfare e.g. education/healthcare
• lack of public goods
• over production of goods with negative externalities
• market failure due to information gaps
• unemployment/low worker pay

Question 12

Command economy

Answer 12

An economy in which resources are solely allocated by the state
- often communist countries (USSR) - rarer now
- gov des ideas how resources should be allocated - often sets targets based on own subjective views of people’s wants
- market prices play little or no part in resource allocation
- gov owns & allocates resources
- allocates good through rationing

Question 13

Command economy example

Answer 13

China/North Korea

Question 14

Public sector

Answer 14

Part of an economy controlled/owned by the government

Question 15

Command economy advantages

Answer 15

• prevents monopolies
• low unemployment - gov can find everyone a job
• maximises welfare - more control over economy so they can prevent inequality and redistribute income fairly
• ensure production of goods are those that people need and are beneficial to society - public goods
• can invest in infrastructure easily
• can protect environment easily, take into account externalities in decision making

Question 16

Command economy disadvantages

Answer 16

• no profit motive, firms told what to produce leading to limited choices for consumers
• less quality/innovation - don’t need to make a profit
• less efficient - lack of completion which drives profit motive
• poor decision making - lack of accurate information (mainly comes from wealthy not normal/poor)
• slow to react to changing needs and wants compared to market
• planners for government not as accurate as market at determining prices - causes shortages/surplus
• weak incentives - lowers productivity/quality - lowers living standards
• government failure possible

Question 17

Mixed economy

Answer 17

An economy in which resources are allocated by the state and price mechanism - mix of public and private sector
Gov often intervened when there is market failure (free market causing undesirable outcome)
- may change law/tax breaks - incentivise people
- buy/provide goods/services

Question 18

Example of mixed economy

Answer 18

Uk and most other countries

Question 19

State is made up of

Answer 19

• territory
• citizens
• government

Question 20

Role of state in mixed economy

Answer 20

• regulates consumers/firms
• redistributes income through welfare planning
• allocated resources through planning

Question 21

Adam Smith (1723-1790)

Answer 21

• shaped traditional economic theory - free market and its ‘invisible hand’ allocated resources in societies best interest as consumers and producers are both motivated by self-interest
• consumer demands and producers supply will lead to price levels being set at beneficial point for both
• will only work properly with no monopolies and low barrier entry to maximise competition
• founder of free market economics but recognised need for some gov. Intervention

Question 22

Karl Marx (1818-1883)

Answer 22

• critical of free market - believed it created small ruling class of producers (bourgeoisie) schibboleth dominated and exploited larger working class (proletariat) - would continue till proletariat revolution whereby then everyone would have an equal share
• lead to rise of communism but ideas contained little about how command economies would actually work

Question 23

Friedrich Hayek (1899-1992)

Answer 23

• supported market system and critisises command economies
• believed gov shouldn’t intervene due to lack of information and instead consumers and producers had the best knowledge
• Price mechanism is the best
• like Smith but more to the side of free market