a) Types of economies

a) the distinction between free market, mixed, and command economies: reference to Adam Smith, Frederich Hayek, and Karl Marx

free market economy = an economy where the allocation of resources is controlled by the laws of supply and demand

• Adam Smith

  • believed the economy functioned best when private individuals worked in their own self-interest

• Frederich Hayek

  • believed there were information gaps in command economies

    • → caused differences in what the people needed and what central planners believed they needed

    • → caused shortages or surpluses of resources

mixed economy = an economy where the allocation of resources is controlled by the laws of supply and demand and the government intervenes to eliminate market failure

command economy = an economy where the state owns all the resources and the government controls their allocation

• Karl Marx

  • believed capitalists exploit workers in free market economies → the state should

    • distribute the means of production between workers

    • become the central planner → they control the allocation of resources