The mixed market economy and the allocation of resources.

• Prices and currency
• Trade
• no quick response to changes/new conditions

=> parallel markets, corruption, queuing, rationing

C Conclusion: 15%

Government’s planners are also just imperfect human beings who naturally cannot  detect demand with sufficient accuracy, because there are no signal such as prices(wikipedia encyclopedia) in addition they think that demand of necessary is fixed so the supply needs to be fixed and therefore it exists just one equilibrium, but in reality it is not the case.

- Real world examples/history (“visible hand”): Failure in achievement of optimal resource allocation (->PPF)

• opportunity cost: more military goods, less public goods = growth without development

• economic/allocative efficiency:

a) comparison with other countries/economic efficiency of DC and an LDC (Webnote #116)

(growth without development in command economies)

b) not on the PPF but inside the PPF =unemployment of FOPs

+ Command Ideas and the three basic questions:

1. public/merit goods  which are more important than luxury goods
2. all combinations of FOPs
3. all people get the goods

(circular flow of money - transfer payments/ price controls/taxes)

=> conclusion

The essential economic problem is limited resources, such as land, labour, capital and enterprise, in relation to unlimited wants. Because of this, consumers, firms and governments need to make decisions. Therefore they have to concern themselves with effective methods of organizing the production, distribution, exchange, sharing goods and services. This allocation of limited resources is organised at markets through several different economic systems.

In the mixed market economy it is partly a decision of the private sector and partly a decision of the government. It contains the features of the market economy and the command economy. Resources are allocated by markets which set prices by a mechanism, called “the invisible hand” by the first economist Adam Smith (1723 – 1790), and government actions.

In the market economy everything is based upon the idea of self interest in private property and strong motivation for private profit. Moreover there exists competition, and one has freedom of choice and enterprise. The role of government is limited to the price determination by supply and demand , which my point proves:

The price mechanism is a process or a system of determination of prices and resource allocation. It operates in a free market only by the interaction of supply (blue line) and demand (red line):

diagram 1:market

                                                   price

                                                                        quantity

These are the driving forces of the market economy and they are constantly changing because of changes in prices of substitute and complementary goods, incomes, tastes, advertising, technology, weather, etc.

The law of supply is that, while other things remaining the same, the quantity supplied will increase as the price increases. The actual amount supplied will be finally determined, by the equilibrium, which depends on the amount demanded as well as what suppliers are willing to produce. And producers and consumers base their production or consumption plans on the current market price.

At the moment the market economy is a very good way to allocate resources, but it is not perfect as this Production Possibilities Frontier diagram shows us. This is because the market economy (grey dot) is not close enough to the (red) PPF line:  

diagram 1:PPF

            Capital goods

                                                                      Consumer goods

Thus the mixed market adapts features and ideas from the command economy, such as some public ownerships and services, planned production, redistribution by the government directives to improve economic efficiency of resource allocation.  

Governments feel that they need to intervene into markets because the equilibrium (black dot) is not always advantageous for all people. Consequently they use a wide range of methods to move or correct both price and quantity.

Some examples for government interventions are: they impose the maximum price below the market equilibrium to help the consumer by making prices cheaper or use a minimum price imposed above the market equilibrium to help producers by making prices higher:

excess demand & excess supply diagram 3

In addition, they need so-called set-asides, which means that the government pays firms not to produce or buffer stocks. This creates funds to buy and stockpile4. Through tax-raising they try to ensure that those that work, especially those that are rich, contribute to the poor and unemployed. There are also payments to individuals who do not supply factors of production.

Actually they adapt the whole command welfare state idea, that the government cares for the community.

This is the main disadvantage of the command economy because then there is no motivation and it does not operate on profit and loss. Inefficient firms do not close and that leads to more loss and bad quality. In some cases this leads to

the governments using completely other mechanism to allocate resources such as queuing, rationing, subsidising and again this can leads to black markets and corruption.

But the command economy idea is not completely useless, because it is more objective, since with this allocation of resources (theoretically) all people gets absolutely the same amount of goods and services and unemployment does not exists .

On the contrary, in the market economy the decision what, from whom and how much to choose belongs to the consumer, that is why the market is able to responds more quickly to new conditions, and the price system improves allocation effectiveness and guides to economic growth. It operates off of profit and loss. Resources follow profits and profits attract competition which leads to more advantages for both sides.

Governments try address then this process using regulations, taxes, and spending. Many resource allocation decisions are best made through markets, but some resource allocation decisions are better addressed using the “dictatorial” powers of government, because sometimes free markets fail to allocate adequately.

The mixed market is, to sum up, definitely a question of ratio between command features and market features. Although it is not perfect, it contains more important advantages for consumers and sellers. As well as it uses resources in a way that generates the highest value of output as determent in the market by consumer, called economic efficiency, because it uses the main advantages from allocations of non-market and market mechanisms.