Types of Economies

Define an economic system

A network of organisations used to resolve what, how much, how, and for whom to produce (used to solve the economic proplem)

Outline a free market economy

In a free market economy, markets allocate resources through the price mechanism- an increase in demand causes an increase in price, which encourages businesses to put more resources into production.

The quantity of products consumed depends on a persons income, which is dependent on the market value of their work.

There is a limited role of government in free market- in a pure free market system, the government limits itself to protecting property rights of people and businesses using the legal system, and protecting the value of money or the value of currency.

Give two examples of free market economies

1. Singapore- government enforces strict property rights and maintains a highly business friendly environment

2. Hong Kong- for years they have were considered the poster child or laissez faire (hands off) capitalism. There is low taxation and minimal government regulation

Outline a planned/command economy

In this economy, the government owns scarce resources- the state allocated resources and sets production targets and growth rates according to its own view of peoples wants

Market prices play little or no part in informing resource allocation descisions

Give two examples of a planned/command economy

1. North Korea- The state owns almost all property, land, and factories.

2. Cuba- after its revolution in 1959, Cuba established a highly planned/command economy- recently it has started to transition towards a more mixed economy.

Outline a mixed economy

In a mixed economy, some resources are owned by the public sector and some are owned by the private sector

The public sector usually supplies public, quasi public and merit goods and intervenes in markets to correct market failure

Nearly all economies are mixed but this can change as some industries are privatised and nationalised.

Advantages of free market economy (3)

A free market economy creates higher competition which has several advantages:

1. Efficient allocation of scarce resources- factor inputs tend to go where the expected profit is highest, and this represents the goods and services people want. This can be linked to the idea of consumer soveriengty.

2. Producers look to protect market share in a free market so may lower their prices which is good for consumers

3. Competition drives innovation and invention which brings higher profits for businesses and better products for consumers- this is dynamic efficiency

Disadvantages of a free market economy (3)

1. There can be inequality within the economy as some people such as the elderly can not work and without government intervention they may be forced into poverty.

2. Demerit goods such as cigarettes and acohol may be overproduced and merit goods underproduced- example of merit goods could be education and healthcare which is not provided by the state in a free market economy.

3. Profit motive may cause firms to try and cut costs by exploiting labout or using environmentally unfriendly methods