2.2: Economic Systems Flashcards
What are the three broad types of economic systems?
Market Economy
Command Economy
Mixed Economy
What are the key characteristics of a market economy?
All productive activities are privately owned, not state-owned.
Goods and services are produced based on supply and demand, with no central planning.
Consumers determine production through their purchasing patterns, signaled via the price system.
Government’s role is to promote competition by outlawing monopolies and restrictive business practices.
Private ownership encourages competition, economic efficiency, and innovation.
Monopolies are discouraged as they can lead to higher prices and reduced quality.
What are the key characteristics of a command economy?
The government plans what goods and services are produced, their quantity, and prices.
The objective is to allocate resources for the “good of society” in line with collectivist ideology.
All businesses are state-owned, aiming to serve the nation’s interests over private individuals.
Historically found in communist countries where collectivist goals took precedence.
Since the late 1980s, the number of command economies has significantly declined.
State-owned enterprises may lack efficiency due to a lack of competition and incentive.
Absence of private ownership limits innovation and dynamism, often leading to economic stagnation.
What are the key characteristics of a mixed economy?
Some sectors are privately owned with free market mechanisms, while others have significant state ownership and government planning.
Mixed economies were once common but are becoming less so.
Governments in mixed economies may take state ownership of troubled firms considered vital to national interests.
Governments in mixed economies often prefer market-oriented solutions to economic problems.
Examples include the U.S. government’s stake in AIG to prevent its collapse and the Canadian government’s purchase of the Trans Mountain Pipeline.
