Premarket, Mixed And Commander Economies Flashcards
Who are the economic agents within the economy
Consumers produces government and special interest groups like environmental or trade unions
What is a free market economy?
An economy that has no government intervention in the allocation of resources or the distribution of goods/services
What is a command economy?
An economy in which all of the resources are owned by the state, and the government controls the contribution of goods and services
What is a mixed economy?
A blend of the free market and planned economy as in individuals firms and the government own factors of production, and distribute goods and services
What did Adam Smith believe about the free market?
Adam Smith advocated for free markets with low levels of government intervention
He recognised that there was a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods
However, he believed economies function best when private individuals work in their own self-interest
Famous quote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”
What did Frederick hayek believe about mixed economies
Friedrich Hayek believed that that command economies were flawed
He identified information gaps between what the economies actually required and what the central planners in command economies were saying it required
These gaps led to shortages or surpluses of goods/services in command economies
He felt that the threat to efficiency and economic growth is overly heavy government intervention
What did karl Marx believe about command economies?
Karl Marx believed that free markets lead to capitalism, in which the owners of the factors of production (Capitalists) exploited the workers
This creates inequality, which will lead to a breakdown between the classes
The role of the State is therefore to share the means of production and ownership with all of the workers in society
This required the abolition of private property
This required the State to become the central planner, deciding how each of the three economic questions would be answered
Advantages of free market economies
Profit incentive motivates people to work or develop entrepreneurial ideas
Greater variety of goods/services
Competition leads to better quality of goods/services
Competition leads to lower prices of goods/services
Competition encourages innovation and product development
Profits, income and wealth are unlimited resulting in better standards of living
More efficient use of scarce resources
Disadvantages of free market economies
Wealth gets concentrated in the hands of the few as they are able to keep buying up the scarce factors of production
This increases inequality such that the gap between the rich and the poor continues to grow
Sometimes product quality falls as firms lower quality standards in order to increase profits
Workers get exploited
Resource depletion and environmental degradation are often ignored
Monopolies develop as firms increase market power through mergers and acquisitions
This leads to exploitation of consumers and supply chains
Command economy advantages
Social equality is the goal of the system as opposed to profit maximisation, so there is less inequality
All workers receive the same wage irrespective of role or career. This helps create social equality
Less unemployment
Resources of the nation can be directed towards urgent priorities quickly
The government owns monopoly businesses so consumer exploitation through high prices can be avoided
Disadvantages of command economies
Receiving the same wage disincentives people from gaining difficult skills (e.g. doctor) as 8 years of study results in the same wage as no study
A lack of competition means that there is less innovation and product development
There is a continual lack of efficiency as central planning always results in surpluses or shortages of goods/services
Black markets multiply as the population seeks to address shortages
Access to higher standards of living is. limited for most of the population
Personal freedoms are restricted
What is the role of the state in a mixed economy?
Some mixed economies have a higher level of government intervention than others
Government intervention occurs mainly through taxation (to raise revenue) and then spending that revenue to redistribute income and provide essential goods/services
There are many different type of tax intervention including personal income tax, corporation tax, value added tax, tariff on imports, inheritance tax etc.
Income is redistributed through the creation of a welfare system which often includes unemployment benefits, healthcare, and pension provision
Government spending is often focused on infrastructure, merit goods (e.g. schools) and public goods (e.g. national defense)
