#economics #themarketsystem

Different Economic Systems

• In order to solve the basic economic problem of scarcity, economic systems emerge or are created by different economic agents within the economy.

  -- These agents include consumers, producers, the government, and special interest groups (e.g. environmental pressure groups or trade unions).

  --Any economic system aims to allocate the scarce factors of production.

• The three main economic systems are a (free) market system, mixed economy, and planned economy.

How the three questions are answered determines the economic system of a country

• Economic decisions need to be made to answer three important questions:

  1. What to produce?

  As resources are limited in supply, decisions carry an opportunity cost. Which goods/services should be produced? e.g. better rail services or more public hospitals?

  2. How to produce it?

  Would it be better for the economy to have labour-intensive production so that more people are employed, or should goods/services be produced using machinery?

  3. For whom are the goods and services to be produced?

  Should goods/services only be made available to those who can afford them, or should they be freely available to all?

  How These Questions Are Answered Determines the Economic System

  
  

How a Market System Works ?

• A market system works to allocate scarce resources efficiently, purely through the forces of demand and supply (the price mechanism).

  -- There is no government intervention in a pure market system (no taxes or government spending).

  -- Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay).

• The price mechanism is the interaction of demand and supply in a free market

-- This interaction determines prices, which are the means by which scarce resources are allocated between competing wants/needs.

• The price mechanism fulfils several functions in an economy:

  --Prices allocate (ration) scarce resources.

• When resources become scarcer the price will rise further. Only those who can afford to pay for them will receive them.

• If there is a surplus, then prices fall and more consumers can afford them.

  --Prices provide information to producers and consumers where resources are required (in markets where prices increase) and where they are not (in markets where prices fall).

--When prices for a good/service rise, it incentivises producers to reallocate resources from a less profitable market to this market in order to maximise their profits.

• Falling prices incentivise reallocation of resources to new markets

Market Equilibrium and Disequilibrium

• Equilibrium in a market occurs when demand = supply.

• At this point, the price is called the market clearing price.

  --This is the price at which sellers are clearing their stock at an acceptable rate.

A graph showing a market in equilibrium with a market clearing price at P and quantity at Q

• Any price above or below P creates disequilibrium in this market

  --Disequilibrium occurs whenever there is excess demand or supply in a market.