economics theme 1 : types of economies

what are the 3 fundamental problems an economy aims to solve

• what should be produced

• how production should be organised

• for whom production should take place

what should be produced in the economy explanation

• have to work out what resources should be provided and how much money should be spent on each sector for example :

• quantities of food, mobile phones or banking services should be produced by the economy

• how many trees should be felled to meet the demand for paper

• should extra money be spent on national defence or should more resources be devoted to health care and education

how should production be organised explanation

• have to decide where to allocate resources and where production should take place (production decisions) for example :

• should a firm use labour or machinery to produce their goods

• how many workers should be employed

• where should production take place (London or Newcastle)

for whom should production take place explanation

• should everybody be entitled to identical shares of production, or should some receive more than others

• distribution of wealth and income is not equal, how can this be fixed

what are the 3 types of economic systems

• market

• planned

• mixed

market economies (free market) definition

• where economic decisions are made completely through the free market mechanism

• forces of market demand and supply, without any gov intervention, determine how resources are allocated

• known as the working of the price mechanism

free market explanation

• what to produce is decided upon by the profitability for a particular product

• when demand for a product is high, the price rises and this raises profitability of selling in the market

• high prices and high profits provide the signal for firms to expand production

• supply from producers responds to consumer wants and needs expressed through the price mechanism

• consumer is said to be sovereign - their ‘economic votes’ determine how resources are allocated

advantages of a free market

• consumers free to buy what they want

• businesses free to produce what sells

• incentive to work

disadvantages of a free market

• price for everything but low tax

• no state intervention and could be dangerous as you can buy whatever (e.g. guns)

• inequality (if your parents are poor and cannot afford to send you to school, you can’t get an education and the cycle repeats)

planned economies (controlled) definition and explanation

• all key economic decisions are made by the gov (or state)

• gov fully decides what to produce, how it is to be produced and how it is to be allocated to consumers

• involves a great deal of economic planning by the state

• price mechanism has no active role since market prices are rarely used

• goods and services can be produced to satisfy the needs of all the citizens of a country, not just those who have the money to pay for goods

advantages of a controlled economy

• theoretically everyone is equal

disadvantages of a controlled economy

• no incentive to work hard

mixed economy definition

• mixture of pure fee enterprise economy and a controlled economy

• is a private sector and a public sector

• to become a mixed economy, the role of the market and the private sector of the economy must be increased

ways an economy can become mixed

• privatisation of state industries

• de-regulation of markets promoting increased competition through the entry of new firms

• gradual ending of state subsidies

• encouraging foreign investment into the economy

advantages of a mixed economy

• gov and entrepreneurs both make decisions

• some state intervention but need tax to do so

disadvantages of a mixed economy

• consumers can’t always buy what they want

• taxes to pay for public sectors (e.g. NHS)

how does taxation work in a planned economy

• gov fully decides what to produce, how it should be produced and how it is allocated

• 100% tax as gov takes your earnings to redistribute

advantages of taxation in a planned economy

• everyone is taxed the same (100%)

• gov then redistributes equally to everyone in the economy

disadvantages of taxation in a planned economy

• consumers can’t buy things they want

• have no choice as the gov chooses for them

• 100% tax is a lot

how does taxation work in a free market

• low tax on everything

advantages of taxation in a free market

• gov have less power on what consumers can buy

• gov have less control over what businesses sell

disadvantages of taxation in a free market

• some consumers won’t be able to afford certain things

• more inequality in purchasing power

how does the education system work in a planned economy

• everyones the same and have the same education

advantages of education system in a planned economy

• equality

• same opportunities as everyone has the same education

disadvantages of education system in a planned economy

• some people might be forced to do certain education for certain jobs that they don’t want to

• people don’t get any freedom in choosing what they want to learn

how is education provided in a free market

• have to pay for any and all forms of education

advantages of the education system in a free market

• more freedom

• can choose what you want to do

disadvantages of education system in a free market

• don’t get the same opportunities

• some people won’t be able to afford it

how is healthcare provided in a planned economy

• gov would pay for anything you need related to healthcare e.g. medicines and surgeries

advantages of the healthcare system in a planned economy

• equality

• everyone gets the same level of help

disadvantages of healthcare system in a planned economy

• doctors and nurses don’t get paid

• less incentive to work and therefore less incentive to help people

how does the healthcare system work in a free market

• have to pay for all / any healthcare services you need

• no help from the gov

advantages of the healthcare system in a free market

• is an incentive to work

• for both doctors and everyone else (all need the money)

disadvantages of the healthcare system in a free market

• if you can’t afford it, you would just have to suffer

• could lead to death

• also a less healthy workforce

• high levels of inequality

how is welfare provided in a planned economy

• gov would give money and housing to those who need it

advantages of welfare in a planned economy

• less worries about not being able to afford necessities

• gov will provide it for you

disadvantages of welfare in a planned economy

• takes money from those who work hard

• gives it to people who don’t work (in some situations they may just be lazy)

• no incentive to work

how does welfare work in a free market

• you would have to pay for housing and care yourself if you need it

advantages of welfare in a free market

• high incentive to work

• those who work hard will be able to pay for better care for relatives, for example

disadvantages of welfare in a free market

• if you physically cant work, you get no support

• won’t be able to pay for basic necessities