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Chapter 2
Economic Systems, Resource
Allocation, and Social Well-Being:
Lessons From China’s Transition
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Economic Systems
• Pure Market Economy
 Private property rights
 Decentralized decision making coordinated
through markets
• Pure Command Economy
 State ownership and/or control of economic
resources
 Centralized planning
• Mixed Systems
 Transitional economy
2-2
Resource Allocation in a
Market Economy
• Market Structure
 Purely Competitive Markets





Large number of buyers and sellers
Each seller offers standardized product
Product prices free to move up or down
Buyers and sellers must be mobile
Freedom of entry and exit
 Purely Monopolistic Markets
 One seller
 Imperfectly Competitive Markets
2-3
Demand
Price$
Price Quantity
($)
(SixPacks
per
Week)
3.00
• Law of Demand
• Other Things Being Equal
D
2.50
2.00
1.50
D
$1.50
1,500
1.00
2.00
1,00
.50
2.50
500
5
10
15
20
Quantity
2-4
Quantity Demanded versus Demand
Price $
D2
3.00
2.50
D
D1
2.00
D2
1.50
•Consumer Income
•Prices of Related
Goods
•Substitutes
•Complements
•Tastes
•Expectations
•Number of
Consumers
D
1.00
D1
.50
5
10
15
20
Quantity
2-5
Supply
Price $
Price
($)
Quantity
(Cars per
year)
$5,000
250,000
20
10,000
500,000
15
15,000
750,000
10
S
5
S
250
500
750
20
Quantity
2-6
Quantity Supplied versus Supply
Price $
•Cost of Production
•Prices of Related
Goods
•Seller’s Expectations
•Number of Sellers
S1
S
20
S2
15
10
5
S1
S
S2
250
500
750
20
Quantity
2-7
Equilibrium
Price $
Surplus
9
8
S
D
7
6
5
4
Shortage
S
D
3
5
6
7
8
9
10
Quantity
2-8
Resource Allocation
in a Command Economy
• Centralized Planning
 The Communist Revolution in China
 Establishment of a Command Economy
• Problems with Centralized Planning
 Initial Phase
 Great Leap Forward
 State Planning Commission
 Cultural Revolution
2-9
Shortcomings of Central Planning
• Informational Requirements
• Incentives for Efficient Production
• Heavy Industry versus Consumer
Goods
2-10
China’s Transition to a
Market-Oriented Economy
• Agricultural Reform
• Industrial Reform
• Lessons for Other Economies
2-11
China’s Transition to Markets: What
Are the Facts?
China’s Comparative Economic Performance Since Reform
Real GDP
China
Crop Production
8.92%
China
6.45%
South Korea
3.31
South Korea
0.05
Singapore
7.66
Singapore
10.55
Vietnam
7.53
Vietnam
4.63
Low-income
4.68
Low-income
4.10
United States
2.57
United States
1.52
Real Per Capita GDP
China
Industrial Production
8.00%
China
11.42%
South Korea
2.38
South Korea
5.13
Singapore
6.65
Singapore
8.50
Vietnam
6.43
Vietnam
10.29
Low-income
2.53
Low-income
5.76
United States
1.61
United States
0.76
2-12
Problems of Transition in China
•
•
•
•
•
Unemployment and inflation
Corruption
Population pressures
Pollution problems
The desire for democracy
2-13