free market v command economies revision

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  • 1. Free market and mixed economies LO: 1. 2. To know the characteristics of different economic systems Understand the advantages and disadvantages of a free market economy and why there are mixed economies.
  • 2. Match up the key words and definitions _______________: an economic system where all resources are allocated through the market forces of demand and supply, with no intervention by the government. ________________: an economic system where all resources are allocated by the government, with no markets (eg ex-Soviet bloc, North Korea). ________________: an economic system where resources are partly allocated by the market and partly by the government (eg, most economies today). Mixed economy Command, or centrally planned economy Free market economy
  • 3. Free market benefits and problems Works automatically without any government intervention the invisible hand Lack of equality Firms may act in a socially undesirable way e.g. pollution No expensive central planning Free People work hard market because of incentives of better pay Competition between Some socially desirable goods may not be provided e.g. education and street lighting Undesirable goods may be overproduced e.g cigarettes, addictive drugs firms keeps prices down Competition limited Consumer sovereignty resources are allocated Encourages self interest and
  • 4. Mixed economy Examples of government intervention in a market economy
  • 5. Mixed Economy Examples of government intervention in a market economy Interfering with prices by way of taxes and subsidies Interfering with income by taxation and welfare payments (to redistribute from rich to poor) Directly providing certain goods e.g. education, defence Introducing legislation preventing production of certain goods (illegal drugs) or safety standards in production of other goods (fireworks) Controlling certain forms of production by nationalisation (ownership by government
  • 6. Jan 2010 One reason for the existence of mixed economies is that A the profit motive is always undesirable B the free market economy always allocates resources efficiently C competition between firms ensures consumer welfare is maximised D the free market economy may lead to market failure. Answer : Explanation (3) _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ ____________________________________
  • 7. January 2012 A free market economy fails to allocate resources efficiently to the production of public goods because A No opportunity cost is involved in the provision of public goods. B Providing public goods can result in a free rider problem. C Public goods can only be provided by the private sector. D The prices of public goods may be set at too high a level. Answer: Explanation (3): ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ ___________________________________
  • 8. Sample Exam Question One reason for the UK being a mixed economy rather than a free-market economy is: A. To reduce Government bureaucracy and inefficiency B. To reduce income inequality C. To increase the incentive to work D. To increase market failure Answer: Explanation (3): _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________
  • 9. Advantages of Free Markets Disadvantages of Free Markets + Competition & Efficiency: in free markets firms compete for profits (& survival) and therefore should strive to increase efficiency. - Inequality: as there is no Government there will be no state provision of benefits or public services. Therefore those on low incomes, the underprivileged & the disabled will struggle to survive and could remain in poverty. - Market failure: there are other market failures + Consumer Choice: also in order to that occur when free markets dont allocated survive and make profits businesses must resources efficiently: match their production to what consumers want to buy. There should also be more e.g. dominant firms may charge high prices firms competing, offering different goods & e.g. some goods may be under-provided, such services which will aid consumer choice. as healthcare & education e.g. some goods may be over-provided, such + Incentives & Economic Growth: in a free as cigarettes, alcohol & CO2 market there is no (or low) income or corporation tax. This gives workers a greater incentive to work and businesses more incentive to make profits. These incentives should help fuel higher economic growth.