Free / Mixed / Command Market Economies

Question 1

What is a free market ?

Answer 1

A system of buying and selling goods and services that is not under the control of the government.

Question 2

Examples of free market economists

Answer 2

Adam Smith
Milton Friedman
Friedrich Hayek

Question 3

Characteristics of a free market

Answer 3

• Relies on the price mechanism and the interaction of demand and supply to allocate scarce resources and solve basic economic problem
• Limited government intervention to influence or change the outcomes of market activity.

Question 4

Examples of free market economies

Answer 4

• United States
• Singapore
• (However they still have significant government sectors).

Question 5

Advantages of free market (3)

Answer 5

• Efficient allocation of scarce resources - resources tend to go where expected profit is highest
• Competitive prices for consumers as suppliers look to increase then protect market share
• Competition drives innovation and invention, bringing higher profits for businesses and better products for consumers.

Question 6

Disadvantages of free economy (3)

Answer 6

• An increase in poverty for those less fortunate and a concentration of wealth amount a few sue to low taxes
• Businesses can develop monopoly power which leads to higher prices and damage to consumer welfare
• Firms will concentrate on the provision of goods which yield a profit and not those that provide social benefit.

Question 7

What is a command economy ?

Answer 7

The government decides what and how to produce goods and how to distribute goods and services within the economy.

Question 8

Characteristics of command economies

Answer 8

• Central planners decide on the allocation of scarce resources, therefore what goods or services will be produced and in what quantities
• Government ownership of some or all of the industries production goods and services.

Question 9

Examples of command economy

Answer 9

• Soviet Union during the communist era
• Nazi Germany
• North Korea.

Question 10

Advantages of command economies

Answer 10

• More equitable allocation of resources to meet the needs of the economy
• Safety net and welfare provision for the lowest income earners e.g. education, health service, welfare payments
• Increased income equality.

Question 11

Disadvantages of command economies

Answer 11

• No choice for consumers - production determined by the planners
• No profit incentive, so no incentive to innovate or produce a wider range of goods
• Central planners choices that think will meet the needs of the economy may not be right, leading to shortages and queues.

Question 12

What is a mixed economies ?

Answer 12

Part of the economy is left to the free market, and part of it is managed by the government.

Question 13

Example of mixed economies

Answer 13

• UK

Question 14

Definition of a positive statement

Answer 14

Testable and measurable.

Question 15

Example of positive statement

Answer 15

Unemployment has risen by 4% in the last 12 months.

Question 16

Why are positive statements important ?

Answer 16

Economists mostly wish to deal in measurable and testable data.

Question 17

Definition of normative statements

Answer 17

Contains a value judgement and consider what ought to be.

Question 18

Example of normative statement

Answer 18

The government should nationalise the railways.