Types of Economies Flashcards
What is an economic system
A network of organisations used to resolve what, how much, how and for whom to produce
Describe a Free Market Economy
Scare resources allocated through price mechanism
An increase in demand raises price - encourages businesses to bring more resources into production
Quantity of products consumed by consumers depends on income
Governments job is to protect property rights of people and business using the legal system as well as to protect the real value of money
Describe a Planned/Command Economy
Government owns scarce resources
State allocated resources - sets productions targets and growth rates according to its own view of peoples wants
Market plays little or no active part in resource allocation
Describe a Mixed Economy
Some resources are owned by the public sector, some are owned by the private sector
Public sector provided merit goods and public goods - intervenes in markets to correct market failure
Define market
Anywhere buyers and sellers come together to transact
Main advantages to a free market
Efficient allocation of scarce resources
Competitive prices
Innovation to satisfy consumers wants and needs
Profit motive stimulates investment
Competition through trade helps to reduce monopoly power - increases choice for consumers
Drawbacks to the free market economic system
Free market can lead to a rise income and wealth inequality - Gini coefficient
Businesses can develop monopoly power - damages consumer welfare
Under provision or non-provision of pure public goods like defence - don’t make profit
Under provision of merit goods - don’t make profit
Free markets may fail to address negative externalities - unsustainable economic growth
Deregulated financial markers are prone to instability
Problems associated with planned/command economy
Scarce resources may not be allocated efficiently - small amount of people are allocating them instead of the market - shortages and surpluses can occur
Corruption can occur and information failure
No incentives for workers and business can damage productivity - lead to lower living standards from over-employment or hidden unemployment
Changing consumers wants and needs can’t be expressed in the market
Higher risk of mal investment
Who is associated with free markets
Adam Smith
Who is associated with planned/command economies
Karl Marx
Who’s associated with mixed economies
Friedrich Hayek
