1.1.6 - economic systems + the basic economic problem

what are the 4 economic systems

subsistence economy

command economy

free market economy

mixed economy

what is a subsistence economy

everyone producing just enough to survive (to subsist)

trade done by bartering - double coincidence of wants (little specialisation + minimal trade)

how does a subsistence economy decide what, how and for whom to produce goods

WHAT: basic necessities

HOW: traditional methods

FOR WHOM: individuals + families

subsistence economy advantages

everyone has essentials for survival

equality

few wasted resources

subsistence economy disadvantages

depends on double coincidence of wants

no scope for growth

surviving not thriving

what is a free market economy

(aka laissez-faire economies) - all resources are privately owned and allocated using the price mechanism + market forces

NO GOV INTERVENTION!

assosciated with Adam Smith + Friedrich Hayek’s writings

what how + for whom do free market economies produce

WHAT: most profitable goods

HOW: most efficient way

FOR WHOM: whoever can afford

free market advantages

low prices - firms compete with prices

incentive to work hard/innovate (to earn more)

lots of profit for entrepreneurs

productive efficiency - firms have to minimise cost

economic growth

(PIPEG)

free market disadvantages

inequality

ppl can’t afford goods produced

market faliure could mean too much resources spent on bad stuff (eg pollution, drugs) and not enough on good stuff (healthcare, national defensive)

no pension/sick pay (welfare) = can’t work, no money

(I AM W)

what is a command economy

aka central planning:

everything owned by the state - money is issued but most goods + services are free

everyone earns the same

associated with beliefs of Karl Marx (thought free market was unstable. wanted “common ownership of the means of production”)

what how and for whom does a command economy produce

WHAT: what the state decides

HOW: governments + its employees

FOR WHOM: everyone (allocated according to need)

command economy advantages

easier to coordinate resources in times of crisis (eg war)

in theory decisions made by the state are to benefit the people (no market failure prioritising bad things over good) (no monopoly power abuse)

equality

everyone’s essential needs are met

(C BEN)

command economy disadvantages

no specialisation

governments can fail + may not be fully informed on what to produce

no incentive for innovation/hard work

lack of competition = inefficiency/low productivity; poor quality products; lack of choice

too much control by the state

(SFICC)

what is a mixed economy

(we are a mixed economy)

some goods and services produced by the free market

others produced by the state

tries to have all the advantages of FM and command without their disadvantages

associated with writings of John Maynard Keynes