Free Market economy etc

Econ

What is an Economic system?

An economic system is a network of individuals, organisations and institutions used by society to resolve the basic problem of what, how, how much and for whom to produce.

What are the 3 characteristics of a free market economy?

• Private ownership of resources

• All economic agents motivated by self interest

• Resources are allocated by the price mechanism

What are the 4 advantages of a free market economy?

• Incentive to work harder for higher wages leading to greater productivity

• Incentive to innovate and invest in new ideas (dynamic efficiency)

• Resources can be bought and sold (obvs)

• Firms face competitive forces driving down prices (broadly)

What is the ‘Invisible hand’?

Adam Smith’s invisible hand= if economic agents act in their own best interests, the price mechanism can promote an efficient allocation of scarce resources for society. 

How does the price mechanism work (in stages)?

• If consumers are willing and able to buy more of a good

• The demand curve shifts right

• Suppliers are incentivised to increase supply to meet demand

• And/or increase price to reduce excess demand

• As a result, market price and supply both increase

• More scarce resources have been allocated to the production of a good and the supply has increased

What are the disadvantages of a free market economy?

• Wealth/income inequality

• Worker exploitation/unemployment/low wages for some

• Market failure can reduce social welfare

• Firms may develop monopoly power and push up prices

Who was Freidrich Hayek and what was his strong belief?

He came from the Austrian school of Econ, he believed in the individual in an economy not the Govt and believed a small group of central planners would never have enough information compared to the market.

What are the two opposing views? Hayek and who else?

Hayek= free market economy price mechanism Keynes in the 1930s= favoured Govt intervention