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Flashcards in Economic systems Deck (10)
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1

Economic systems

the way which an economy tries to solve the basic economic problem of scarcity. The means by which choices are made in an economy

2

Market economy

an economy where the basic economic problem is solved by market mechanism / price mechanism

3

Centrally planned economy

an economy where the basic economic problem is solved by the government

4

Mixed economy

an economy where the basic economic problem is solved by both the market forces and the government

5

Transition economy

an economy that is moving from centrally planned economy to market economy

6

3 advantages and disadvantages of market economy

ADVANTAGES
1. consumer sovereignty
2. competition encourages innovation, R&D
3. price mechanism is used to allocate resources

DISADVANTAGES
1. public goods are not produced
2. monopoly abuse of power, inequality & poverty
3. merit goods underproduced, demerit goods overproduced

7

3 advantages and disadvantages of centrally planned economy

ADVANTAGES
1. lower prices
2. full employment
3. low levels of inequality

DISADVANTAGES
1. government lacks full information
2. shortages & surplus are common
3. lack of competition, slower growth rate

8

3 advantages and disadvantages of mixed economy

ADVANTAGES
1. use of price mechanism
2. macroeconomic stability through the use of fiscal, monetary and supply side policy
3. competition, innovation, R&D

DISADVANTAGES
1. difficult to know how much govt. should intervene
2. govt. failure can occur
3. uncompetitive government monopoly occur

9

What are the requirements for transition in transition economy?

1. Privatisation
2. remove government price controls
3. use of market mechanism (supply and demand)

10

What are the problems when transitioning?

1. GDP may fall at first
2. price rises
3. infrastructure might not be good enough