Th1.1: Free Market Economies

Question 1

What happens in a free market economy?

Answer 1

individuals are free to make their own choice and own the factors of production without government interference

Question 2

How are resources allocated?

Answer 2

through the price mechanism

Question 3

What do consumers make decisions based of?

Answer 3

satisfaction

Question 4

What do producers make decisions based off?

Answer 4

profit

Question 5

Why are there no completely free markets in the current world today?

Answer 5

the government has to intervene at least to an extent, for example with issuing money, breaking up monopolies and protecting property rights

Question 6

Who believed in the free market economy?

Answer 6

Adam Smith

Question 7

What does the ‘invisible hand’ do in the market?

Answer 7

allocates resources to everyone’s advantage, allowing the greatest good for the greatest number of people

Question 8

What did he believe competition in the market did?

Answer 8

caused lower prices as firms wanted to be competitive, therefore benefitting the consumer as they can get goods cheaply

Question 9

Advantage 1:

Answer 9

system is automatic due to ‘invisible hand’

resources are moved out of production when people stop wanting it or costs are too high

Question 10

Advantage 2:

Answer 10

consumer sovereignty - consumers have freedom of choice

Question 11

Advantage 3:

Answer 11

high motivation as people know working hard could lead to potential rewards, creating conditions where initiative and enterprise flourish

Question 12

Advantage 4:

Answer 12

political freedom

Question 13

Advantage 5:

Answer 13

because firms are in competition, they will produce goods at lowest cost, ensuring production efficiency

Question 14

Advantage 6:

Answer 14

in general, free markets tend to have higher growth

Question 15

Disadvantage 1:

Answer 15

tends to be high levels of inequality, since rich own more factors of production and so can grow richer

Question 16

Disadvantage 2:

Answer 16

may be a lack of merit goods and little control in demerit goods

Question 17

Disadvantage 3:

Answer 17

resources could be wasted on unproductive expenses such as advertising, switching factors of production and providing competitive services

Question 18

Disadvantage 4:

Answer 18

if competition disappears there may be monopolies, who charge high prices and offer low quality of service

Question 19

Disadvantage 5:

Answer 19

problem of externalities