Economic systems and thinkers

Question 1

A mixed economy is where:

Answer 1

Resources are allocated by the price mechanism and the government e.g. Wales

Question 2

A command economy is where:

Answer 2

Resources are allocated by the government e.g. North Korea

Question 3

A free market economy is where:

Answer 3

Resources are allocated by the price mechanism

Question 4

We already know that Adam Smith came up with:

Answer 4

Specialisation and the division of labour

Question 5

what type of economy did Adam Smith advocate for?

Answer 5

Free markets

.he believed the price mechanism was very efficient so we should let the price mechanism to do the job

. he believed government should only intervene to correct market failure.

.Smith described the price mechanism as an “invisible hand”.

Question 5

what type of economy did Karl Marx advocate for?

Answer 5

command economies

.Marx was against free markets as he believed free markets lead to capitalism and the exploitation of workers as capitalists (owners of factors of production) will exploit workforce by paying low wages to maximise profits which will lead to uneven distribution of income and inequality.

Question 6

what type of economy did Fredrich Hayek advocate for?

Answer 6

free market economy

.criticised command economies
. he believed it was impossible for the government to collect all the information about what consumers in the economy needed/ demanded
.price mechanism worked as a communication network

Question 6

what are the pros and cons of a free market economy?

Answer 6

PROS:
.price mechanism is super efficient when allocating resources
.Lower prices (because of increased competition)(however point for monopoly)
.increases choice ( increased incentive for innovation)

CONS:
.Inequality (no regulation of minimum wages= exploitation of labour.)
.monopolies(inelastic demand)
.market failure ( positive externalities are under consumed and underproduced)

Question 7

what are the pros and cons of a command economy?

Answer 7

PROS:
.quickly correct market failure with government intervention
.less inequality ( everyone earns same wages)
.stops monopoly abuse

CONS:
.Government failure (from unintended consequences e.g. black market’s)
.destroy incentives
.limited choice

Question 8

define Regulation

Answer 8

when governments makes changes to the law to address market failure.