Types of Economy

Question 1

What types of economy are there?

Answer 1

1) Free market economy
2) Command economy
3) Mixed economy

Question 2

What is a free market economy?

Answer 2

Free Market Economy- all resources privately owned & all are allocated via price mechanism- no government intervention- economic decision making decentralised among individual consumers & producers- don’t exist in reality

Question 3

Which economists is a free market economy associated with?

Answer 3

1) Adam Smith

2) Friedrich Hayek

Question 4

What are the advantages of a free market economy?

Answer 4

1) Competition means firms keep production costs ⬇️- to sell 🚘 & 🧹- competitive price (productive efficiency). Competition- firms produce 🚘 & 🧹 that consumers demand (allocative efficiency)- price mechanism dependent on consumer demand
2) Better quality products- firms compete- better quality- advantage over rival firms
3) Greater choice- wider variety of 🚘 & 🧹- workers- wide employment choices/opportunities
4) Financial incentives- entrepreneurs take risks and invest- earn profit- labourers- incentive to work hard- earn more 💵

Question 5

What are the disadvantages of a free market economy?

Answer 5

1) Monopolies (firms which dominate market) form- competition- rival firms taken over
2)💰 distribution unequal- lack welfare support (no government intervention)- people in poverty
3) No public goods (defence ⚔️ street 💡) or merit goods ( 🏥, 👨‍🏫 )

Question 6

What is command (planned) economy?

Answer 6

Command (planned) Economy- public ownership of all resources (government control)- all allocated by government- economic decision making centralised- ✖️ price mechanism- 👍 during war BUT personal freedom & living standards jeopardised

Question 7

Which economists is a command economy associated with?

Answer 7

Associated with Karl Marx (communism)- focus on human need rather than profit 💵

Question 8

What are the advantages of a command economy?

Answer 8

1) Maximisation of output replaces maximisation of 💵 as 🔑 aim for firms- cooperation more likely-> ⬆️ output
2) ⬇️ inequality compared to FME- government controls wages- all workers
3) Government funds supply- public 🚘 e.g. defence and subsidises merit 🚘 e.g. 👩‍🏫, 🏥 etc- beneficial to society

Question 9

What are the disadvantages of a command economy?

Answer 9

1) ✖️ price mechanism- markets may suffer from excess demand/supply (shortages & surpluses)-> inefficient allocation of resources
2)✖️ competition between firms-> inefficiency- productivity ⬇️
3) ✖️ competition-> poor quality products- emphasis on maximising output rather than 💵
4) ✖️ financial incentives-✖️ profit incentive to take risks, develop new 🚘 & 🧹 – just maximise output- labour has small incentive- work hard- wages fixed-> ⬇️ productivity

Question 10

What is a mixed economy?

Answer 10

Mixed Economy- some resources owned & allocated- private sector & some by public sector- most common in today’s world e.g. 🏴󠁧󠁢󠁥󠁮󠁧󠁿, 🇺🇸, 🇫🇷, 🇩🇪 etc- gains 👍 of market economy BUT avoids 👎 through government intervention (corrects market failure- help them work ⬆️ effectively)

Question 11

Which economists is a mixed economy associated with?

Answer 11

John Keynes