1.1.6 Free market economies, mixed economy and command economy

free market economy

all resources allocated based on supply and demand and the price mechanism, no government intervention

command economy

government decides how all resources should be allocated

mixed economies

when both the price mechanism and the government play a role in allocating resources

role of state in a mixed economy

to correct market failure and aim to attain efficient allocation of resources

advantages of a free market economy

increase efficiency- firms and individuals incentivised to work hard

entrepreneurship is encouraged and rewarded so innovation and risk taking occurs

increase choice and variety for consumers

disadvantages of a free market economy

inequalities of income and wealth

no provision of public-goods

monopolies occur

general market failure

unemployment

adam smith

shaped traditional economic theory- believed economic agents were rational

believer in free market and how its invisible hand would allocate resources efficiently

believed consumers and producers are motivated by self-interest and maximising their utility

in free market demand and supply works to set price that works for both consumers and producers

believed in low barries of entry to encourage competition and reduce monopolies

believed in specialisation and trade

karl marx

critical of free market and believed it created a small ruling class, bourgeoisie, that dominated and exploited the larger working class, proletariat.

argued that profit-maximisation lead to exploitation of workers

believed ion revolution and workers taking control of all resources

lead to growth of communism

friedrich hayek

supporter of free-market and critical of command, believed government doesn’t have sufficient information to allocate resources efficiently

believed individual consumers and producers had the best knowledge of what they want and need so economy should be left to price mechanism

price mechanism form of communication between producers and consumers, efficient allocation of resources