Topic 1 - Introduction to Economics

Question 1

What are the disadvantages of a free market economy?

Answer 1

• Overproduction of demerit goods
• Underproduction of merit goods
• Resources used up quickly, leading to environmental damage
• Some members of society will be unable to look after themselves (orphans, seniors, the sick, long-term unemployed)
• Large firms may grow and dominate industries, leading to high prices and a loss in efficiency

Question 2

What are the disadvantages of a planned economy?

Answer 2

• Total production, investment, trade, and consumption, are too complicated to plan efficiently
• Because there is no price system in operation, resources will not be used efficiently
• Distorts incentives. Difficult to motivate workers with guaranteed employment and managers without any share of profit
• Loss of personal liberty and freedom of choice
• Governments may not share the same aims as the majority of the population