Different economic systems

In a free market economy which 2 parties usually make the economic decisions?

Private individuals and firms

Who are 2 of the key figures in the free market economy?

Adam Smith and Friedrich Hayek

What did Adam Smith advocate for?

The invisible hand to allocate resources efficiently

What are 3 advantages of the free market economy?

• Choice

• Dynamic - new ideas, consumers needs are met

• The competition stives for a lower price with improved quality as this is what is demanded

What are 3 disadvantages of the free market economy?

• Market failure

• Inequality - people with limited resources may struggle

• Few producers may dominate

What is Market failure?

When the price mechanism fails to allocate scarce resources efficiently

What did the economist Keynes support?

Significant government intervention in the economy to stimulate growth

Which free market economist completely opposed Keynes view?

Hayek

What part of Adam Smith’s view did Hayek disagree with?

Government intervention has a role in money markets and financial markets

Instead of the part of Adam Smith’s view that Hayek disagreed with what did he believe instead?

Intervention in money markets was one of the main causes of economic instability (booms and recessions patterns)

For Hayek what was the only possible role for governments?

Maintain law and order

Why was Hayek strongly against command economies?

A small group of individuals would be entirely responsible for determining the allocation and distribution of resources and they would never have enough information to meet peoples needs

What did Hayek believe overall about Markets?

Markets alone would have the information needed to make decisions because markets coordinate the views and information held by everyone in a spontaneous way

What year did Adam Smith write his book?

1776

What was Adam Smith’s book called?

Wealth of Nations

In Adam smiths book what 2 key points did he write about in reference to the free market economies?

• Invisible hand of resource allocation

• Role of self interest

What did Adam Smith warn that we should be wary of and why?

Businesses that become too large (monopolies) because of their tendency to raise prices

What did Adam Smith say that the main important role of government would be and why?

Maintain law and order because the many poor would want to take over the property of the rich

In a free market economy what type of rich people would there be according to Adam Smith?

Property owners

What are 5 other roles of the government identified by Adam Smith?

• Issuing of patents and copyright (protect intervention)

• Providing national defence

• Regulating the banking sector

• Building infrastructure

• Providing pure public goods

In a command economy who makes all the economic decisions?

Government or central authority

Who are 2 key figures of the command economy?

• Karl Marx

• Friedrich Hayek

What did Karl Marx envision in terms of command economies?

A classless society with centralised planning

In terms of command economies what was Friedrich Hayek a critic of?

Central planning

What are 3 advantages of the command economy?

• Less inequality

• Cooperation between workers/firms leads to high output

• Government can protect environment

What are 3 disadvantages of the command economy?

• Inefficient resource allocation leads to excess supply and shortages develop

• Lack of competition reduces efficiency

• Narrow range of choice of goods

Which economist developed many of Adam smiths ideas on capitalism and free market economies?

Karl Marx

What did Marx believe about profit?

The drive for profit by business owners in the capitalist systems would bush workers wages to subsistence levels and they would be exploited

According to Marx what would capitalism be replaced by (from a revolution lead by exploited workers)?

Socialism

In a mixed economy which 2 parties play significant roles in making economic decisions?

• Private sector

• Government

Why are mixed economies called mixed economies?

The combine elements of free market and command economies

Which economies usually have mixed economic systems and provide an example?

Modern economies e.g. United States

How long was Karl Marx alive?

1818 - 1883

How long was Adam Smith alive?

1723-1790

How long was Friedrich Hayek alive?

1899-1992