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Flashcards in Types of economies Deck (10):

The 3 types of economies

free market, command & mixed


Free market economy - advantages (4)

1. economic efficiency + lower prices b/c
competition = firms trying to keep production costs down (productive efficiency) to sell as a more competitive price
competition = firms try to produce goods and services consumers demand (allocative efficiency) = equlibrium
2. better quality of products
competition = firms continuously trying to improve quality of their products = advantage over rivals = consumer sovereignty (consumer power in market)
3. great choice
consumers = buy from wide range of goods + services
workers = wide choice of employment opportunities
4. financial incentives
entrepreneurs - incentive to invest + take risks to earn profit
workers - incentive to work hard = gain more earnings


Free market disadvantages (4)

1. monopolies
competition = rival firms get taken over / go out of business
2. unequal distribution of income and wealth = lake of welfare = poverty
3. external costs / benefits of production / consumption b/c externalities are ignored in the price mechanism
4. info gaps
lack of regulations + tax to protect consumers = consumer excess amount of demerit goods b/c unaware of dangers
5. insufficient quality of public / merit goods b/c of free rider problem
6. erratic swings
business cycle: economic boom = inflation / economic slump = unemployment


Free market def

All resources are privately owned + allocated via price mechanism w/ minimum to no government intervention


Free market creator

Adam Smith - government intervention = threat to economic growth


Command economies def

an economy in which decision of resource allocation are guided by the state


command economy advantages (5)

1. corporation between firms = high levels of output b/c KEY AIM FOR ALL = maximisation of output not profit
2. reduction in inequality b/c gov controls wages of all workers
3. gov may limit the external costs of production / consumption
4. gov can fund provision of public goods + increase their provision = produce more external benefits to society
5. gov has more control = smaller sings in business cycle = less unemployment / inflation


command economy disadvantages

1. price mechanism is unable to operate = markets suffer from shortages (excess demand) + surpluses (excess supply) = inefficient allocation of resources
2. lack of competition between firms = less incentive = inefficiency = low production
3. lack of competition between firms = poor quality productions esp b/c aim is maximisation of output
4. less choice of goods / services for consumers + labour directed to specific jobs w/ no choice (depending on location)
5. lack of financial incentives =
entrepreneurs / managers - no profit incentive to take risks as focus on maximising output
labour - little incentive to work hard b/c wages fixed by gov
6. under-performance
economic growth + living standards grow slower than free markets


command economy creator

Karl marx - free market economy would break down b/c owners of business made huge profits at expense of workers


gov role in mixed economy (2)

intervene at different extents to...
1. ensure minimum standard of living (under provision of merit goods / missing markets of public goods)
2. correct market failure = markets work more effectively
(mostly provides education, healthcare ,defence, law and order in society)