Microeconomics - Lec 2

8/10/2019 Microeconomics - Lec 2

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Economic System

Economic System is a set ofmechanisms and

institutions thatresolve the

_______,

______, and ________questions



Types of Economic Systems

►The market economy

►The command economy

►The mixed economy



Characteristics of Capitalism

Price Mechanism It means the free operation of demand

and supply forces without anygovernment intervention.

All economic processes such asconsumption, production, savings,investment will according to price

mechanism (let people do as theychoose without governmentintervention) and is labelled as invisiblehand by Adam Smith



Private Ownership►

Private ownership of resources.Every individual has a right toacquire private ownership ofresources.

► Private individuals can

accumulate property and use itas they choose.

► Example : If Amin wants to buya bungalow, he can purchase

the property if he has sufficientmoney. There is no restrictionon the number of properties

Amin can own.



Role of Interest

►Individuals are free tomake choices.

►Customers would maximize

their satisfaction.

►Businessmen aremotivated by profits. They

produce in order tomaximize profits.



Consumer is said to be the king .

►Consumers’ decisions wouldinfluence the producers’decisions of what to

produce.►Producers have to produce

goods and services to meet

customers’ tastes andpreferences, otherwise theywill not be able to sell whatthey produce.



Presence of Competition

►Competition is healthy as itencourages research anddevelopment.

► Invention and innovation aremade possible with science andtechnology. With the existenceof such elements, economic

growth can be achieved.►Producers will keep improving

their techniques of productionin order to compete with other

firms.



Limited government intervention

►Limited governmentintervention in theeconomic activities of the

economy.

► All economic activities arecarried out by the private

sector.

►For example : televisionstations and telephone

services.









Advantages : Economic Freedom

►Economic freedom means the rightto earn property.

► It also means a freedom ofenterprise and a choice ofoccupations.

►This will lead to the sourcing of thecountry’s manpower from different

sectors.



Production according to the need ofconsumers

►Producers produce goods and services thatconsumers want and this maximizes theneeds and satisfaction of consumers.



Efficient utilization of resources

►Competition creates efficiency in production.

► Quality goods are produced at lower cost.

►

Consumers get the highest quality goods ata lower cost since production techniques aremore efficient.



Variety of Consumer Goods

►Competition takes place with regard to allaspects of the product such as shape,quality, colour, design and packaging.

►Therefore, consumers will enjoy a widevariety of the same product.

►There is also a variety of consumer goodsbecause of freedom of enterprise, resultingin greater production.



Enhanced trade, business, researchand development

►Producers are always on the lookout fornew innovations to compete with otherproducers.

►This will lead to a rapid expansion and anincrease in employment and income.

►Innovators enjoy the benefits of theirresearch through copyright and patents.





Flaws in Capitalism

►No central authority to protect propertyrights, and enforce contracts.

►Some producers may try to monopolize

by eliminating the competition.►So-called public goods , such as national

defense, will not be produced by privatefirms because they cannot prevent non-payers from enjoying the benefits ofpublic goods.



Disadvantages : Unequal distribution ofincome and wealth

►Since there is no governmentintervention in the market, thesystem of private property

widens the gap between therich and the poor.

►Those who have wealth canobtain resources and start

businesses while the poor onlyhave their labor to offer.

►In other words, the rich get

richer and the poor get poorer.



Inflation and high unemploymentrate

►Since it is governed by the “invisible hand”,business fluctuations cause high

unemployment rates during depression.



Lack of social welfare

In free economy, social welfare isignored.

Owners do not provide any

pension, social security or accidentbenefits to employees.

There is also insufficient provisionof public facilities such as schools,hospitals and etc.

Undesirable social effects such astheft and crime tend to be high.





Social Costs

►Workers may face social problems such ashealth problems arising from the pollutedenvironment caused by an improper

disposal of factory wastes.

►The intention of most producers is toincrease private profit and this often leads

to a neglect in the welfare of their workers.



Mao Zedong Vladimir Ilyich Lenin

http://upload.wikimedia.org/wikipedia/commons/4/43/Lenin_CL.jpg

http://upload.wikimedia.org/wikipedia/en/e/e1/Mao-tiananmen-portrait.jpg



Characteristics of Pure CommandSystem

►Public ownership of resources

► All the resources are owned and operatedby the state or the government in the

interest of society as a whole.►This is to ensure equal opportunity of all

citizens regardless of their income.

►Public ownership also aims to fully utilizethe country’s resources and maximize socialwelfare.



Central Planning

►The central authority is responsible formaking economic decisions for society.

►The authority plans and allocates resourcesbetween current consumption andinvestment for the future.



Price mechanism of lesserimportance

►Socialism gives less importance to marketforces.

►Prices are fixed by the government and notdetermined by demand and supply.

►Private profits are not allowed and publicinterest is emphasized in the command

economy.



Command Economies: Advantages

Abundant provision of collective goods (e.g.education, health, public transport andrecreational facilities)



Production according to basic needs

►Production is directed at producing the basicneeds of the people such as food, clothingand building materials.

►It is not determined by the purchasingpower of the rich in society.

►The phenomenon of the rich getting richer

and the poor getting poorer does not existin the socialist economy.



Equal distribution of income andwealth

►This system providesequal opportunities for

all citizens in earning anincome.



No serious unemployment orinflation

►The unemployment rate and inflation areusually taken care of by the government toensure economic stability in the country.



Social Welfare

►The government will provide all citizens ofthe country with full social security benefitssuch as pension, accident benefits and

wastage of resources do not exist in asocialism system.

l f C d S



Flaws of Command System

► Running an economy is so complicated that

some resources are used inefficiently.► Since nobody owns resources, people have less

incentive to employ them in their highestvalued use.

►

Central plans may reflect more the preferencesof central planners than those of society.

► Since government is responsible for allproduction, the variety of products tends to bemore limited than in a market economy.

► Each individual has less personal freedom inmaking economic choices.



Absence of competition

►Since there are limited private enterprises,less research and development activities arecarried out.

►This results in low quality products sincethere is no competition.





Mixed Economy

►This is an economic system which combinesboth capitalism and socialism to solve basiceconomic problems.

► A mixed economy is an economy in whichboth the public and private sectors play arole in the economy.



Public and Private Ownership ofresources

►Private enterprises conduct business freely.

►

Government encourages the private sectorby providing them with infrastructure andfacilities.

h d



Price mechanism and economicplans in making economic decisions

►The price mechanism is used to price bothgoods and services.

►However commodities such as sugar,oil and

rice are declared as controlled items inMalaysia and the government fixes theirprices.

►

Most of the mixed economies accepteconomic planning as an instrument ofeconomic growth.

C d



Command Economy1. What? One person or a group of people (oftengovernment officials) decide what products are

needed. In most cases, their decisions are dictatedby what they believe is important.

2. How? Since the government owns all the meansof production in a command economy, the

government runs all the businesses. It decides howgoods and services will be produced. It employs allworkers and controls all employment opportunities.

3. For whom? The government decides who will get

what is produced. In principle, all the people shareequally in the nation's wealth. In that way,everyone's basic needs are met. There is muchsecurity in such a system-but at the cost ofindividual freedom.

G h l l i



Government helps to control incomeinequality

►In most mixed economies, the governmentcontrols income inequality through incometaxes and welfare payments.

►The government helps to narrow the incomegap between rich and the poor.

G i i i h



Government intervention in theeconomy

►The government will not intervene in the economyexcept for particular industries.

► In a mixed economy, the government useslegislation for unsafe goods categorized as illegalproducts such as military items.

►The government also uses direct provision such aseducation, defense and health to increase thestandard of living.

►The government caters projects that areconsidered as unprofitable for the private sector.

► Example : low cost housing projects.



Government control of monopolies

►Monopolists are single players in anindustry.

►They have complete, sole control over theprice of goods or services.

►In order to avoid customers being exploitedby monopolists, the government will

regulate the power of monopolists.



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Microeconomics - Lec 2