Unit 4 : Market and Mixed Economies

Market and Mixed Economies

·         All economies have to answer 3 fundamental questions:

o   What to produce

o   How to produce it

o   Who is to receive the products produced

·         These questions arise because of The Basic economic problem: Unlimited wants exceed scarce resources

Different Economic Systems

Planned Economy

·         Aka centrally planned, command economy, collectivist economy

·         One in which the state (government) makes the crucial decisions

·         Land and capital are state owned

·         Gives instructions(directives) – resources are allocated by directives to SOEs (State Owned Enterprises)

·         Definition : A planned economy is an economy where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives

Market Economy

·         Aka free enterprise economy

·         It is an economy where consumers determine what is produced

·         Resources are allocated by price mechanism

·         Resources switch from products that are becoming less popular to products that are becoming more popular

·         Government intervention is minimum

·         Land and capital are privately owned

·         Private firms decide how to produce the products that consumers want to buy.

·         Firms have two methods of production – capital or labour intensive

o   Capital intensive: Employs large amounts of capital relative to labour. Example : Steel firms

o   Labour intensive: Uses a relatively high number of workers in comparison with the amount of capital used. Example: Hotels.

·         Firms use the least cost method of production

·         The advantages of market economy

o   A market economy should be very expensive in consumer demand

o   Consumers are said to be sovereign

o   Choice: Consumers can choose which product from which firm

o   Efficiency: Promoted by profit motive and competition

o   Incentive: High incomes provide incentives to workers to work hard and entrepreneurs to expand firms

·         The disadvantages of market economy

o   Firms only take into account the costs and benefits to themselves. Eg: Smoking

o   Competition will result in domination by one or a few firms leading to limited choices

o   Firms may not be able to respond to desires of consumers

o   Firms will not make products unless they can charge for it

o   Advertising can distort consumer choice

o   Consumers may have a lack of income. There can be a very uneven distribution of income

·         Definition: A market economy is an economy where consumers determine what is produced, resources are allocated by price mechanism and land and capital are privately owned.

Mixed Economy

·         An economy in which both the private and public sectors play an important role

·         Both consumers and government influence what is produced

·         Benefits due to state intervention:

o   Government takes into account all the costs and benefits that will arise from their decision

o   Encourages the consumption of beneficial products by granting subsidies and providing information

o   Discourages the consumption of harmful products by imposing taxes, providing information and passing legislation

o   Can finance the production that cannot be charged for directly. Eg: Defence

o   Can prevent private sector firms from exploiting consumers by charging high prices

o   Can make maximum use of resources

o   Can plan ahead to a greater extent than private sector firms

o   Can help vulnerable groups – can create a more even distribution of income

·         Definition: A mixed economy is an economy in which both the private and public sectors play an important role.

Examples of different economic systems

·         Mixed – Sweden

·         Market – USA

·         Planned – Cuba

Unit 3 : Opportunity Cost

Opportunity Cost

·         It is the cost of a decision in terms of the best alternative given up to achieve it

·         It is the best alternative forgone

Occurrence of opportunity cost

Ø  Opportunity cost and consumers: Consumers are the buyers and users of goods. They have to decide which product to buy.

Ø  Opportunity cost and workers: Undertaking one job involves an opportunity cost

Ø  Opportunity cost and producers: Produces have to decide what to make

Ø  Opportunity cost and government: Government has to decide its expenditure of tax revenue on various things

Economic goods and Free goods

o   Economic goods are products which require resources to produce it and therefore has an opportunity cost. They are limited in supply.
Example : Carpets, A child’s education.

o   Free goods are products which do not require any resources to make it and so do not have an opportunity cost. They are products for which people do not have to pay for.
Example : Sunshine, Water in the Rivers

Production Possibility Curve

o   PPC aka opportunity cost curve/ production possibility boundary/ production possibility frontier

o   It shows the maximum output of two products and combinations of these products that can be produced with existing resources and technology

This PPC shows that there is a maximum output of DVD players and MP3 Players and the combination of the two products can be produced with existing resources.
that means, at A,B,C, you can have an optimum utility of your resources.

(Image taken from google)

Unit 2 : Factors of Production

Factors of production

Definition : They are the economic resources of capital, enterprise, labour and land

TYPES OF FACTORS OF PRODUCTION

Land

·         Covers any natural resource which is used in production

·         Includes what is beneath the land, what grows naturally on land, what is found in them.

·         The supply of land : The amount of physical land in existence does not change in time, therefore

·         The mobility of land : Occupationally mobile, Geographically immobile.

Capital

·         Any human-made goods used to produce other goods and services

·         Example: Offices, factories, machinery

·         Capital is also known as capital goods and producer goods

·         They are not wanted for their own sake but for what they can produce
Consumer goods are wanted for the satisfaction they provide to their owners

·         Supply of capital:

o   Increases with time. Every year some capital goods physical wear out and some become outdates.

o   The total value of the output of capital produced is referred to as gross investment.

o   Some of the capital goods produced will be replacing those which have worn out or become obsolete.

o   The value of replacement capital is called depreciation or capital consumption

o   Net investment is the value of the extra capital goods made

o   Net investment = Gross Investment – Depreciation

·         Mobility of capital:

o   It varies according to the type of capital good.

o   Example: A photocopier is geographically mobile. A coal mine is geographically immobile as well as occupationally immobile. An office block is occupationally mobile.

Labour

·         Labour covers all human efforts – both mental and physical, involved in producing a good.

·         Supply of labour: it is influenced by 2 factors:

o  Number of workers available (which is influenced by:)

§  Size of the population

§  Age structure of the population

§  Retirement age

§  School leaving age

§  Attitude towards working women

o   The number of hours for which they work (which is influenced by:)

§  Length of an average working day

§  Full time/ Part time

§  Duration of over-time

§  Length of holidays taken

§  Length of sick leaves/ time lost through sickness & illness

·         Those people who are working or are seeking work from the labour force(work force)

·         Productivity : output per worker hour

·         The mobility of labour: Varies from person to person. The causes for geographical immobility of labour:

o   Differences in the price and availability of housing in different areas and countries

o   Family ties

o   Differences in educational systems in different areas and countries

o   Lack of information

o   Restrictions on movement of workers (visa)

·         The main cause for occupational immobility: lack of appropriate skills and qualification.

Enterprise

·         It is the willingness and ability to bear uncertain risks and to make decisions in a business

·         The supply of entrepreneurs is influenced by:

o   A good education system (university degree courses in economics and BST)

o   Lower taxes on firm’s profits (corporate tax)

o   Reduction in government regulations.

·         The mobility of enterprise : It is the most mobile factor of production – both occupationally and geographically mobile

PAYMENTS TO FACTORS OF PRODUCTION

Land – Rent

Capital – Interest

Labour – Wages

Entrepreneur – Profit