Part 6 - Economic Systems and thinkers Flashcards
(20 cards)
Who is Adam Smith?
Created idea of invisible hand and specialisation
What is the invisible hand?
Idea that market will correct itself by consumers and producers interacting to achieve own objectives
What is specialisation?
Process of breaking down the production process into smaller, specialised parts
What are the problems with capitalism?
The ‘bourgeoise’ are the ruling class (owners of capital, small minority)
Marx believed it would self destruct as it is one stage of an economic system’s progression
Workers could be exploited due to profit seeking nature of capitalists
Incentive to replace labour with machines increases unemployment
Results in a monopoly
Why do we need govt intervention in the economy? (Keynes)
During recession, C, I, X fall due to reduced confidence
State intervention needed to moderate booms and busts in economy
Private sector decisions can lead to adverse macroeconomic outcomes
Why should the govt not intervene in the economy? (Hayek)
Individuals won’t have perfect information, but they’ll have the best knowledge of their situation
Price movements occur as individuals participate in the market
Market reflects all info available so resource allocation will be best it can be
If govt intervenes, allocation wont be successful due to lack if info
What is a free market economy?
In a free market economy, resources are owned by individuals and not by the state
No govt interference, prices set by supply and demand
What are the advantages of a free market economy?
Profit motives and competition leads to lower prices and creation of new goods
Consumers have freedom to buy and work for who they want
Invisible hand ensures right quantity of goods and services are produced
Incentive for labour to work hard
What are the disadvantages of a free market economy?
Consumers may not have enough info to make choices or act irrationally
System prone to financial crisis
Over provision of negative externalities like pollution
Under provision of positive externalities like education
High levels of inequality
No provision of public goods like street light
Whats an example of a free market economy?
USA
What a command economy?
Relies exclusively on the state, govt decides what is made, how its made, how much is made ect. Prices decided by govt
What are the advantages of a command economy?
Greater income equality as resources are distributed by the govt
Externalities should be eliminated as the govt considers the total benefits and costs
One producer should lead to increased efficiency through economies of scale
What are the disadvantages of a command economy?
Without profit incentive, govt has no need to produce new products
High levels of beuracracy
Govt may not have enough info to know what consumers need
Consumers have little economic freedom or choice
Prices often kept low, leading to shortages
Whats an example of a command economy?
North Korea
What is a mixed economy?
Contains elements of both types of economy. Govt operates public sector, private sector left to price mechanism and market forces but regulated by laws
Whats an example of a mixed economy?
UK
Which system did Adam Smith favour?
Free market or mixed
What system did Karl Marx favour?
Command economy
What system did Friedrick Hayek favour?
Free Market
What system did Keynes favour?
Mixed
