Scarcity Revisited Tradition command market Without scarcity there

Scarcity Revisited Tradition, command, market Without scarcity, there would be no economic problem & no need for prices.

n How is scarcity dealt with?

An economic system n Every society needs to develop one. It’s a set of institutional arrangements and a coordinating mechanism to respond to the economizing problem (scarcity). n Economic systems differ as to (1) who owns the factors of production and (2) the method used to motivate, coordinate, and direct economic activity.

What will be produced? n n In a market system, the goods and services produced at a continuing profit will be produced, and those produced at a continuing loss will not. TR>TC=expanded production & movement of resources toward that industry. Consumer sovereignty is crucial in determining the types and quantities of goods produced. Wants are registered through “dollar votes” in the market. Every dollar spent on a specific product is a “vote” toward the popularity of that product.

How will goods & services be produced? n They will be produced in combinations and ways that minimize the cost per unit of output. n Maximizing efficiency per unit of output helps to maximize profits, thus eliminating high-cost producers. (see chart on p. 35) n The most efficient technique depends on: the available technology and the prices of needed resources.

For whom? n Products are distributed to consumers based on their ability and willingness to pay the existing market price. n Consumers must have sufficient income and the desire to purchase certain goods.

Tradition n Depending on the society, the government, and many other variables, scarcity and opportunity cost are dealt with in different ways. n In some instances, the tradition of the society or culture is how scarcity is dealt with. A certain amount of a certain product has always been produced and will continue to be produced.

The Command System Connected to socialism or communism. Gov’t owns most property resources and economic decision making occurs through a central economic plan. n Nearly all major decisions are made by central planning board which is appointed by the gov’t. n Central planning board determines production goals for each enterprise and specifies the amt. of resources to be allocated so that those goals can be reached. n Division of output between capital and consumer goods is centrally decided, & capital goods are allocated among industries on the basis of the central planning board’s long-term priorities. n

Command (cont’d) But, even the most powerful command economy, the Soviet Union, allowed for some private ownership and combination of markets before it fell in 1992. n China has greatly reduced the reliance on central planning. Although gov’t ownership of resources and capital in China is still extensive, they have relied on free markets to organize and coordinate its economy. n Cuba and North Korea are the 2 remaining prominent centrally planned economies. n

The Market System n n AKA capitalism. Characterized by private ownership of resources and the use of markets and prices to coordinate and direct economic activity. Participants in this economy act in their own selfinterest. Allows for economic decisions to be made in the markets (places where buyers and sellers come together).

Market (cont’d) Goods and services are produced and resources are supplied by whoever is willing and able to do so. n Competition is the result. It occurs between independently acting buyers and sellers of each product and resource. Competition diffuses economic power and limits the actions of any single seller or buyer. n In pure capitalism—or laissez-faire capitalism— gov’ts role would be limited to protecting private property and establishing and environment appropriate to the operation of the market system. n