Download ECONOMIC SYTEMS COMMAND VERSUS MARKET THE

ECONOMIC SYTEMS
COMMAND VERSUS MARKET
THE MARKET SYSTEM
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BASED ON EXCHANGE (between buyers and sellers)
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NECESSARY CONDITIONS/CHARACTERISTICS
o Private Property (absolutely critical)
o Freedom of Enterprise and Choice (critical)
o Self-interest (assumed in all systems)
o Competition (critical for efficiency)
o Markets and prices (obvious)
o Active but limited Government
Defends private property, freedom of
enterprise and choice and competition
Corrects market failures
CHARACTERISTICS OF ALL MODERN ECONOMIES
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Use of technology and capital goods
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Specialization of inputs
o Division of labour
o Geographic specialization
o Specialization of capital goods
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Use of Money
MARKETS AT WORK – The fundamental questions
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What and how much to produce?
o Consumer sovereignty and "$ votes"
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How to produce?
o Competition leads to productive (technical)
efficiency.
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How to distribute?
o Based on consumer's willingness and ability to
pay
o Ability to pay based on income and wealth which
are tied, in part, to consumer's productivity and
control of resources.
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How will the system accommodate change?
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How will the system promote progress?
COORDINATION
o Markets find answers to the economic questions
as if guided by an "invisible hand"
o Failure of the Command System: coordination
and incentive problems
MARKET FAILURE (an introduction - we will revisit this
issue several times in the course)
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Definition: Markets fail when they do not automatically
achieve:
o allocative efficiency and/or
o productive (technical) efficiency and/or
o dynamic efficiency
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Examples of market failures
o Externalities or spillovers
o Public goods (and quasi-public goods)
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Government as part of the circular flow
THE CIRCULAR FLOW
INTRODUCTION TO THE LAWS OF SUPPLY AND
DEMAND
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FACTORS INFLUENCING QUANTITY DEMANDED
FACTORS INFLUENCING QUANTITY SUPPLIED
THE CONCEPT OF EQUILIBRIUM QUANTITY AND
PRICE
SHORTAGES AND SURPLUSES
THE EFFECTS ON EQUILIBRIUM PRICE AND
QUANTITY OF SHIFTS IN DEMAND AND SUPPLY
Quantity demanded depends upon:
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The product's price
Consumers' tastes
Consumers' incomes
The size of the population (i.e., the number of
consumers)
The price of substitutes
The price of complements
Expected future prices
Etc., etc., etc.
To draw the relationship between price and quantity
demanded, all other variables must be held constant. This
is the ceteris paribus assumption.
Price
PRICE FALLS
Price
$8
POPULATION RISES
$8
$6
D2
D
10
12
Quantity Demanded
D1
10
13
Quantity Demanded
Tastes
Population
D
D
Quantity Demanded
Income (normal good)
Quantity Demanded
Income (inferior good)
D
D
Quantity Demanded
Price of Substitutes
Quantity Demanded
Price of Complements
D
D
Quantity Demanded
Quantity Demanded
Expected future price
D
Quantity Demanded
Quantity supplied depends upon:
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The product's price
Technology (improved processes often lower the cost of
production)
Resource prices (i.e., the cost of inputs)
The prices of other goods that could be produced with
the same inputs
Expectations about future prices
The number of sellers
Taxes and subsidies
Etc., etc., etc.
To draw the relationship between price and quantity
supplied, all other variables must be held constant. Again,
the ceteris paribus assumption.
Price
PRICE FALLS
Price
# OF SELLERS
INCREASES
S
S1 S2
$8
$8
$6
8
10
Quantity Supplied
10
13
Quantity Supplied
Technological Progress
Input prices
S
S
Quantity Supplied
Quantity Supplied
Prices of other goods using
same inputs
Expected future price
S
S
Quantity Supplied
Quantity Supplied
Number of Sellers
Business Taxes
S
S
Quantity Supplied
Quantity Supplied
EFFECTS OF SHIFTS IN BOTH SUPPLY AND DEMAND
ON EQUILIBRIUM PRICE
Change
in D
Effect on
P
Change
in S
+
+
-
+
+
-
+
+
-
Effect on
Net
P
Effect on
P
+
+
?
+
?
EFFECTS OF SHIFTS IN BOTH SUPPLY AND DEMAND
ON EQUILIBRIUM QUANTITY
Change
in D
Effect on
Q
Change
in S
+
+
-
+
+
-
+
+
Effect on
Net
Q
Effect on
Q
+
+
?
+
?