free market economies, mixed economy & command economy

what is the basic economic problem in a free market?

what to produce, how to produce and who to produce for

how can the basic economic problem in a free market be solved?

by market forces - these are the forces of supply and demand

what do the forces of supply and demand (market forces) work together to do?

to determine what price and quantity of goods and services are supplied

at what price will businesses supply what is demanded?

at a price that allows them to make a profit

when will customers demand what is supplied?

if it is at a price that they can afford

what is the market mechanism?

the means by which decisions of consumers and businesses interact to determine the allocation of resources

how will consumers act?

to maximise their personal welfare

how will producers act?

to maximise their profits

how will owners of factor inputs act? (owners of factor inputs = households/individuals that supply the FOP)

to maximise personal gain

what are the 4 FOP?

land, labour, capital, enterprise

what is the factor input for land?

rent

what is the factor input for labour?

remuneration (money paid for a work/service)

what is the factor input for capital?

interest

what is the factor input for enterprise?

profit

how will the government act?

to maximise benefits to society

Adam Smith - FREE MARKET

self-interest benefits society as a whole

Friedrich Hayek - COMMAND ECONOMY

the state should not interfere in the free market - its role should be to maintain the rule of law. the state has a role to play - creating a ‘safety net’, e.g. social insurance (like NHS), but too much govt. intervention makes problems worse, distorts smooth-running free-market