Free Market and Command Economies

free market economy
1. a market which resource allocation is guided by market forces without intervention of the state
2. Characteristics
  1. Private ownership of resources
  2. market forces determine prices
    1. e.g. supply and demand
  3. producers aim to maximise profits
  4. consumers aim to maximise satisfaction
  5. resources are allocated by price satisfaction
3. Main actors
  1. Motivation
    1. profits
    2. personal satisfaction
    3. wages
  2. Private ownership
    1. factories, firms, land owned privately
    2. not by governement
  3. Free enterprise
    1. can produce what you want
  4. Competition
    1. lots of economic activity
  5. Decentralised
    1. Descions are not made by government
4. Advantages
  1. Consumer sovereignty
    1. spending decisions by consumers determine what is produces
  2. Flexibility
    1. free market system esponds quickly to changes in consumer wants
  3. No officials are needed to allocate resources
  4. Profit motive
    1. provides an incentive for firms to rake riskes
  5. Competition and profit motive
    1. help promote efficient allocation of resources
  6. Increased choice
    1. for consumers compared to command economies
  7. Economic and political freedom
    1. For consumers and producers to own resources
5. Disadvantages
  1. inequality
    1. Widened wealth gap
    2. those with resources become richer
      1. those without become poorer
  2. Trade cycles
    1. Free market economies suffer instability
      1. booms and slumps
  3. Imperfect information
    1. consumers may be unable to make rational choices
      1. if they have inadequate information or if there is asymmetric info
  4. Monopolies
    1. Danger that one firm will become sole supplier of a product
      1. and exploit consumers by changing prices higher than the free market equilibrium
  5. Externalities
    1. the costs and benefits which are not taken into account when goods are produced and consumers
  6. No government regulation
    1. lots of criminal activity
    2. lots of de-merit goods
      1. e.g cigarettes
command/planned economy
1. e.g
  1. North Korea
  2. Cuba
2. a market where resources are allocated by the government
3. Government own key sections of the economy
4. Highly regulated markets
Mixed economies
1. Most countries fall here
2. a combination of a free market and a command economy
3. overcomes problems of free market economy or a command economy

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Free Market and Command Economies

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	Created by juliasutton over 11 years ago