Chapter 6:Economies in Transition
Economic systems: is a set of institutions for allocating resources and making choices to satisfy human wants.
Resource allocation is the assignment of resources to specific tasks to determine the basic economic choices, which are what to produce, how to produce, and for whom to produce for.
In a market system the forces and interaction of supply and demand for each commodity determines what and how much to produce. Prices are the reflection of the scarce resource.
The problem is what combination or mix of productive resources or inputs should be used in order to produce a desired product. That is to use more labor and less capital or vice versa, to more skilled labor and less units of unskilled labor or vice versa. In a price system, the combination or mix of inputs should be based on least-combination method. This method maximizes the profit and minimizes the cost. In other words, the least-cost combination is the level of input use that produces a given level of output at minimum cost. On the other hand, in a price system, competition will force firms to use the least cost combination method. Competition means there are large numbers of buyers and sellers in each market that are acting independently. Therefore, those firms that use the least cost combination method will be able to lower the price of their products and make a profit.
The distribution of goods and services depends on the distribution of money income. Money income, in turn, depends on the quantity, quality and the types of resources and the prices of the product. Therefore, the distribution of finished goods and services will depend on consumers’ ability and willingness to pay the market price. In fact, relative prices ration the available resources, goods and services.
Resources may be allocated by tradition, by markets, or by planning. In a traditional economy, goods and resources are allocated according to historical patterns. However, in a market economy, goods and resources are allocated according to the decisions of individual producers and consumers.
In a Planning economy, goods and resources are allocated according to the central directions of a government agency.
It is a system where most wealth is generated by businesses, but the government plays a major part in allocating resources. The resources are obtained from business and workers in the form of taxes.
Frontier capitalism: Economics in transition from state ownership and control of resources to a system private ownership system in which the price system is used for resource allocation.
Pure Capitalism and the Market System: Under this system resources flow into activities that are most profitable and out of those activities that are not as profitable (losses). Therefore, profits determines what to produce and in turn what to produce will be determined by what people will buy at profitable prices.
A- Private property: private individuals and firms own resources. Property rights apply intellectual property through patents and copyrights. This encourages people to innovate, invent new products and seek for an exchange.
B- Freedom of enterprise and choice: Resource owners including labor are free to move in and out of industries and geographical location. Private owners have the right to obtain economic resources, and to organize those resources. Resources move to areas of higher profits. Owners can manage their property and money and workers are free to choose jobs in which they are qualified. Consumers decide through their choices what to produce. Workers maximize their satisfaction by finding the best jobs that can fit their qualification.
C- Market price system: Prices are determined by the interaction of demand and supply. In a market system, prices are a communicational system through which producers and consumers carry out their decisions.
There are some other characteristics
All industrialized economies experienced in technological development and the extensive of capital goods. In fact, this technological development is the result of competition, freedom of choice, and self-interest
Therefore, risk takers are rewarded by higher profits for their new products.
Specialization: Focusing an individual’s efforts on a particular task.
The three Ps of pure capitalism are prices, profits and private property.
Frontier Capitalism: there are four states involve in the development of this process.
Stage I: - the central government does not control resource allocation
Stage II – small businesses flourish, but commercial laws are not established
Stage III - slow economic growth though it is not measured well.
- the development of small financial markets( foreign investment )
Stage IV: - more attraction of the direct foreign investment
Russia and its former satellites
Two-thirds of Russia’s economy is now in private hands and the private sector accounts for more than half of Russian output.
The Russian tax system is so high, that is enforced, they would amount to a confiscation to of wealth. Therefore, exchanging goods for goods (Barter) are traded nearly 40 per cent of industrial transactions to avoid taxes. The solution to this problem is that the tax system should be simplified and judiciary system and police must be enforced.
Chinese Economy: China has some form of command socialism, but the share of the government in economic activity is declining gradually. In 1978 reforms were implemented in agriculture. In the 1980s central planning was relaxed and a large number of government run enterprises were privatized. Therefore, the state-owned sector dropped from almost 70 percent of industrial production in the mid 1980s to less than 40 percent by 1996.
D) market capitalism
D) market socialism