1.1.6 Free market economies, mixed economy and command economy

1.1.6 Free market economies, mixed economy and command economy

what is a free market economy

an economy that has no government intervention in the allocation of resources orthe distribution of goods/services

what is a mixed economy

blend of the free market and planned economy as individuals, firms and the government own factors of production and distribute goods/services

what is a command economy

economy in which all ofthe resources are owned by the state and the government controls the distribution of goods/service

Describe Adam Smith, Friedrich Hayek and Karl Marx in relation to the different economys

• ADAM SMITH = FREE

  • he believed economies function best when private individuals work in their own self-interest

• FRIEDRICH HAYEK = MIXED

  • felt that the threat to efficiency and economic

    growth is overly heavy government intervention

  • identified information gaps between what the economies actually required and what the

    central planners in command economies were saying it required These gaps led to shortages or

    surpluses of goods/services in command economies

• KARL MARX = COMMAND

  • believed cappatalism in free lead to workers being exploited by the employers

  • role of state is to share means of production and ownership

advantages and disadvantages to free market

AD

• profit motive, encouraging firms to innovate

• choice for customers

• competition to improve products and lower prices for customers

DIS

• an increase of poverty for those less fortunate, and more wealth among a few

• no social welfare

• firms will concentrate on provisions of goods that yield profit and not those that have a social benefit

advantages and disadvantages to mixed economy

AD

• economic stability - intervention by gov can occur

• social welfare - gov can provide goods that may be under provided in a free (education)

• protection of customers and workers - gov regulation can stop worker exploitation

DIS

• inneficiency - gov intervention can be inefficient

• lack of flexability - gov may be slower at responding to a change

• pottential for corruption

advantages and disadvantages to command economy

AD

• more equal allocation of resources to meet needs of economy

• increased income equality

• saftey net for lower income earners

DIS

• no choice for consumers

• no profit incentive - no incentive to innovate

• centeral planners make choices they feel meets the need of the economy - but may not get this correct