NATURE OF ECONOMICS (Types of market free questions) Flashcards
What is a free market economy and give an example?
A free market economy is one where less than 40% of the country’s GDP is from the government. Resources are allocated through the price mechanism. No government intervention. (driven by demand) Only intervene for Justice and Defence.
Eg Hong Kong.
Define a mixed market economy and give an example?
Where between 40% and 60% of the GDP comes from the government. There are privately owned business as well as the state. Government will intervene to help economy. For example (France, Germany)
Define a planned economy and give an example? (what else can it be called)
Command economy/ command economy.
A planned economy is where all GDP is from the government. The government dictate what goods should be produced and how much should be produced and there is no private property.
Example North Korea.
3 advantages of a free market economy?
- Economic and political freedom of free enterprise.
- The system is automatic due to the invisible hand mechanism. A good is moved out of production when people stop wanting it or the price is too high.
- flexibility a free market economy can respond quickly to changes in demand.
- Increased choice for consumers.
4 disadvantages of a free market economy
- can lead to inequalities of wealth
- can lead to negative externalities (limitless production can lead to high pollution.
- High danger of monopolies where one firm gets a majority market share.
- trade cycles, there are likely to be slumps in a free market economy.
Why are there mixed market economies?
They allow for the free trade that occurs in free market economies, but they also have the regulation from the government to provide support and prevent the negative externalities.
Which economist is linked with command economies?
Karl Marx (the founder of communism)
Which economists are linked with free market economies?
Smith and Frederich Hayek (they argued that other models were too restrictive.
Which economist believed that governments should intervene?
Keynes believed that economies should intervene.
What were the main theories of Adam Smith?
What type of economy did he promote?
In his book an inquiry into the wealth of nations. That when individuals follow self interest they indirectly support the good of the economy and allocate resources efficiently. (The invisible hand). He promoted free market economies.
What were the theories of Frederich Hayek?
What economy did he promote?
In his book the road to seldom Hayek argued that non-free markets restricted the political and enterprise freedom. He also argued that even when markets failed governments should not intervene and let the market cleanse itself by stepping back.
What was the economic theory of Karl Marx?
“the father of Communism”.
Believed that capitalism was unstable and exploited the rights of factory workers. Eventually this would cause workers to overthrow their masters.
What was the economic theory of John Maynard Keynes?
He believed that government intervention was needed in order to keep a healthy economy. He argued that governments should help stimulate economies
What are the 4 Advantages of command economies?
- The state provides a minimum standard of living so there is less inequality.
- As the government is in charge they want the good of the welfare of the people rather than making profit so there are more merit goods.
- less wastage of resources as less money is spent on advertising or competitive services.
- standardised products means they are produced cost effectively.
What are the 3 disadvantages of command economies?
- decision making is very slowly as it has to go through various stages and there is also bribery and corrupption.
- Because everyone receives the same wage there is no motivation and less motivation because people know working harder will not increase their standard of living.
- less consumer choice
