Theme 1.1.6 Flashcards
(16 cards)
Describe free market
Where resources are allocated by the price mechanism w/o gov intervention and there’s private ownership
Describe Adam Smith’s correlation to the free market
He believed in the free market and ‘laissez- faire’ approach and described how the ‘invisible hand’ would allocate resources in society’s best interest.
He believes that consumers and producers are motivated by self interest: consumers seek to max utility and producers to max profits.
for free markets to work properly there couldn’t be any monopolies and there would have to be low barriers to entry to max comp.
Describe a command economy
Where resources are allocated by gov planning and the state owns most factors of production
Describe Karl Marx’s correlation to command economies
He was critical of the free market and argued it created the situation where a small ruling class of producers dominated and exploited the larger working class.
Criticised capitalism for exploitation; promoted classless, state-run economy to meet needs, not profit
Describe mixed economy
Combines free market and government intervention. Both private and public sectors allocate resources.
Describe Friedrich Hayek’s correlation to mixed economies
Warned against excessive government control (loss of freedom), but accepted some intervention in practice.
Describe the role of the state in a mixed economy
Resource allocation: State corrects market failure (e.g. public goods, externalities).
Redistribution of income: Taxation & welfare reduce inequality.
Regulation: Laws to control monopolies, protect consumers & workers.
Macroeconomic management: Fiscal & monetary policy to stabilise economy.
Which type of economy would a communist country like North Korea or Russia be?
Command
In which type of economy is there no private property and everyone’s assumed to be selfless?
Command
Give the advantages of a free market economy
Allocative efficiency
Encourages competition
Job creation
Explain the advantages of a free market economy
A.E: there will never be long run disequilibriums because we know the functions of the price mechanism will mean excess demand, shortages and surpluses will not take.
Encourage competition: lower prices, ⬆️C.S, ⬆️qty, ⬆️ choice, ⬆️quality-> firms are competing w/ each other given consumers what they want they’ll keep their cost low and will decrease price.
Job creation &Eco. Growth: qty is at its max level (Q*) and as labour is a derived demand there will be more job creation + highly competitive markets ->high qty level-> boost real GDP->economic growth ->improved living standards.
Give the disadvantages of a free market economy
Non profitable goods may not be made
Market failure
Inequality
Excessive profiteering
Explain the disadvantages of a free market economy
Market failure: assume markets are competitive w/ high number of buyers and sellers + low berries to entry -> opposite: few/1 seller + high barriers to entry -> monopoly/oligopoly market power-> ⬆️P, lower qty + imperfect info -> ⬆️C of demerit goods.
Inequality- P* may be an efficient price but it may exclude many consumers to access the market (they can’t afford it) so if this good isn’t a necessity-> not fair (wealth gap).
Excessive profiteering - how are firms making profit? Cost cutting ? Unethical?
E
Give the advantages of a command economy
Less wastage of resources
Equality
Planning can ensure provision of merit goods
Low unemployment
Give the disadvantages of a command economy
Inefficiency — lack of profit motive reduces productivity.
Lack of choice — limited variety for consumers.
Poor information — planners can’t match real consumer wants.
Explain the advantages of a command economy
Equality — reduces income & wealth gaps.
Planning can ensure provision of public/merit goods.
Less wastage of resources- no need for competitive services/ advertising = $$
