Types of economies

Question 1

The 3 types of economies

Answer 1

free market, command & mixed

Question 2

Free market economy - advantages (4)

Answer 2

1. economic efficiency + lower prices b/c
   competition = firms trying to keep production costs down (productive efficiency) to sell as a more competitive price
   competition = firms try to produce goods and services consumers demand (allocative efficiency) = equlibrium
2. better quality of products
   competition = firms continuously trying to improve quality of their products = advantage over rivals = consumer sovereignty (consumer power in market)
3. great choice
   consumers = buy from wide range of goods + services
   workers = wide choice of employment opportunities
4. financial incentives
   entrepreneurs - incentive to invest + take risks to earn profit
   workers - incentive to work hard = gain more earnings

Question 3

Free market disadvantages (4)

Answer 3

1. monopolies
   competition = rival firms get taken over / go out of business
2. unequal distribution of income and wealth = lake of welfare = poverty
3. external costs / benefits of production / consumption b/c externalities are ignored in the price mechanism
4. info gaps
   lack of regulations + tax to protect consumers = consumer excess amount of demerit goods b/c unaware of dangers
5. insufficient quality of public / merit goods b/c of free rider problem
6. erratic swings
   business cycle: economic boom = inflation / economic slump = unemployment

Question 4

Free market def

Answer 4

All resources are privately owned + allocated via price mechanism w/ minimum to no government intervention

Question 5

Free market creator

Answer 5

Adam Smith - government intervention = threat to economic growth

Question 6

Command economies def

Answer 6

an economy in which decision of resource allocation are guided by the state

Question 7

command economy advantages (5)

Answer 7

1. corporation between firms = high levels of output b/c KEY AIM FOR ALL = maximisation of output not profit
2. reduction in inequality b/c gov controls wages of all workers
3. gov may limit the external costs of production / consumption
4. gov can fund provision of public goods + increase their provision = produce more external benefits to society
5. gov has more control = smaller sings in business cycle = less unemployment / inflation

Question 8

command economy disadvantages

Answer 8

1. price mechanism is unable to operate = markets suffer from shortages (excess demand) + surpluses (excess supply) = inefficient allocation of resources
2. lack of competition between firms = less incentive = inefficiency = low production
3. lack of competition between firms = poor quality productions esp b/c aim is maximisation of output
4. less choice of goods / services for consumers + labour directed to specific jobs w/ no choice (depending on location)
5. lack of financial incentives =
   entrepreneurs / managers - no profit incentive to take risks as focus on maximising output
   labour - little incentive to work hard b/c wages fixed by gov
6. under-performance
   economic growth + living standards grow slower than free markets

Question 9

command economy creator

Answer 9

Karl marx - free market economy would break down b/c owners of business made huge profits at expense of workers

Question 10

gov role in mixed economy (2)

Answer 10

intervene at different extents to…
1. ensure minimum standard of living (under provision of merit goods / missing markets of public goods)
2. correct market failure = markets work more effectively
(mostly provides education, healthcare ,defence, law and order in society)