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Economies: their similarities and

differences
Economic systems or economies are the ways in which societies are organised to
satisfy the needs and wants of people within them.
Every economic system has in common the fact that they must answer five key
questions (see text page 5)
(subconsciously making decisions)

What goods and services should be produced?


How much of these goods and services will be produced?
How to produce these goods and services?
For whom production takes place, or how these goods and services will be
allocated or distributed?, and
How will future production decisions be made

However, what differs is the way in which economies answer these questions.
The two broad types of economic system are the market economy and the
planned economy.
-

Market economy is laissez faire (in their purest form)


Deregulation
Communist countries are more planned
We have gov. regulation to ensure equality
Income distribution. Unemployment benefits. For public services that
private services cant provide. privatisation may alienate some
Regulations about quality control.
Mixed can provide stability. Purely market, great depression, no
government intervention
Deficit budget (GNT, gov. spending taxation) injecting more in the
economy. At times with unemployment, thus can help
Price mechanism, price and quantity. People who want things and
people who supply them. When prices are higher, we want more of
something; when something is lower in terms of price, people want it

The Market Economy (ps.30-32 of your text)


Market economies like Australia and the USA are organised through a
series of product and factor markets involving buyers and sellers of final

goods and services and productive resources. A market is a situation


where buyers and sellers come into contact for the purpose of exchange. It
could be online, a transaction occurs. Exchange of goods and services
A product market is called a commodity market, this market sells goods
and services.
A factor market exists when factors of production are bought and sold.
The price mechanism or price system allocates resources according to
consumer and producer preferences. In market economies, individuals
make the key economic decisions guided by self interest (you want to do
what is best for you. They want to make as much money as they can, the
producer). The power that the consumer holds within such an economy is
called consumer sovereignty (advertising can undermine consumer
sovereignty. Your decisions will influence what is produced in society).
Firms in these economies are motivated by the profit motive and the
freedom to pursue the acquisition of private property through freedom of
enterprise (ability to set up a business if you want to). Competition is
important in a market system because firms then try to maximise profit
and so produce what consumers want. Ologopily, only a few sellers (Cars)
and when you have a few, they really compete (lots of money into
research and development).

In a market economy the economic problem is solved as:


what to produce and how much to produce is determined by the
operation of the price mechanism, with consumer preferences and
consumer sovereignty determining the pattern of production and the
quantities of output produced. For example, if consumers want to buy
large framed sunglasses, then they represent a demand for them, and
firms in a quest to make as much profit as they can, will make and sell
large framed sunglasses.
How to produce this is also determined by the profit motive. If capital is
cost effective relative to labour, then labour-capital substitution may
occur, as capital is substituted for labour for example, the use of robots
in car manufacturing. In less developed or developing economies, labour is
less expensive, and so labour-intensive (as opposed to capital intensive
production) will take place. (you might do something labour intensive, you
might want to get the public support because you are supporting
Australian; get the status idea; the quality can be better; high quality. We
go for capital intensive because we use more machinery)
To whom to distribute individual consumers incomes will determine how
much and what they can consume. Within a market system, individuals
who possess skills which are highly demanded in the labour market (a
factor market) can command a higher price (wage) whilst those who may
be unskilled may only earn a lower wage. Those on higher incomes will be
able to not only consume more goods, but also more expensive goods.

Some market economies operate as welfare states as their governments use


high levels of taxation to achieve substantial transfers of incomes towards the
lower income groups. Examples of these economies can be found amongst the

Scandinavian economies such as Sweden and Norway. Swedens economy differs


from the Australian economy in that high taxes ensure that government
spending has a big impact on what is produced, how it is produced, and who
receives the benefits from production. The Government in this welfare state
economy provides generous welfare payments and a wide range of free or
heavily subsidised services such as rent subsidies, and free education.
Other market economies might be newly industrialising economies (NIEs), such
as South Korea, Thailand and Malaysia. As many of these are in the Asian region,
they are called the Asian Tigers. These are economies which were formerly
developing economies with low incomes per capita and poor living standards.
They have begun to develop and grow, and so are characterised by high GDP
growth rates, decreasing infant mortality rates and increasing literacy rates.

The Planned Economy


Planned economies like the former Soviet Union, Cuba and Yemen use command
or government planning to allocate resources according to the priorities for
production set by a state planning authority or agency. The governments of
these economies are or were Communist and adopted the economic system
developed by Karl Marx. The state owns the resources (except labour) and makes
most of the production, distribution and exchange decisions and sets prices and
incomes according to government priorities or goals. There is limited personal
economic and political freedom in such a system. These systems have generally
failed due to a lack of incentive or motivation. There is no profit motive or
freedom of enterprise, so output and productivity are often low.
Transition economies are those which are going through a process of change in
identity. They retain some aspects of a planned economy, although have made
legislative changes to adopt aspects of market economies for example,
Vietnam and China.
Mixed Economies
Most economies in the world are mixed that is they are neither purely planned
nor purely market economies. Economic decisions in these economies are made
through markets although governments do interfere to improve the use of
resources, the amount of competition and to reduce the inequality in income
distribution. Australia has a mixed market economy.

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