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Chapter 16Chapter 16Economies in TransitionEconomies in Transition

Microeconomics for TodayMicroeconomics for TodayIrvin B. TuckerIrvin B. Tucker

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What will I learn What will I learn in this chapter?in this chapter?

•The different forms of The different forms of economic systemseconomic systems and how they operateand how they operate

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What is an What is an economic system?economic system?

•Determines what good Determines what good and services are and services are produced, how they are produced, how they are produced, and for whom produced, and for whom they are producedthey are produced

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What are the basic What are the basic types of economic types of economic

systems?systems?•TraditionalTraditional•CommandCommand•MarketMarket

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What is aWhat is atraditional economy?traditional economy?•A system that answers A system that answers the what, how, and for the what, how, and for whom questions the whom questions the way they always have way they always have been answeredbeen answered

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What is the What is the benefit of a benefit of a

traditional economy?traditional economy?•There is little friction There is little friction among members among members because relatively little because relatively little is disputedis disputed

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What are the What are the disadvantages of a disadvantages of a

traditional economy?traditional economy?•Restricts individual Restricts individual initiative initiative

•Lack of advanced goods, Lack of advanced goods, new technology, and new technology, and growthgrowth

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What is aWhat is acommand economy?command economy?•A system that answers A system that answers the what, how, and for the what, how, and for whom questions by whom questions by central authoritycentral authority

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What is the structure What is the structure of a command of a command

economy?economy?

•It has a pyramid It has a pyramid structurestructure

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The Command Economy PyramidThe Command Economy Pyramid

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What are the What are the strengths of a strengths of a

command economy?command economy?•Economic change can Economic change can occur very quicklyoccur very quickly

•Social welfare can be Social welfare can be enhancedenhanced

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What are the What are the weaknesses of a weaknesses of a

command economy?command economy?•Decision makers Decision makers have the power to be have the power to be absolutely wrongabsolutely wrong

•Quality and variety of Quality and variety of goods suffergoods suffer

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Planners set the price of mirrors below

equilibrium

Shortage of mirrors

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200 400 600 800 1000

$20

$60

$80

$40

Pri

ce p

er s

ide

mir

ror

(rub

les)

Quantity of side mirrors (thousands per day)

E

Price set by planners

Shortage of 400,000 thousand side mirrors

S

D

Central Planners Fixing Prices

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What is aWhat is amarket economy?market economy?

•An economic system An economic system that answers the what, that answers the what, how, and for whom how, and for whom questions by the free questions by the free marketmarket

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Who was Who was Adam Smith?Adam Smith?

•The father of modern The father of modern economics who believed economics who believed that a free market that a free market economy acted like an economy acted like an “invisible hand”“invisible hand”

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What book didWhat book didAdam Smith write?Adam Smith write?•The Wealth of Nations The Wealth of Nations published in 1776published in 1776

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What is theWhat is theinvisible hand?invisible hand?

•The belief that the best The belief that the best interests of a society are interests of a society are served when individuals served when individuals are allowed to act in are allowed to act in accordance to their own accordance to their own self interestself interest

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What is the advantage What is the advantage of a market economy?of a market economy?

•It provides a wide It provides a wide variety of goods and variety of goods and services that buyers and services that buyers and sellers exchange at the sellers exchange at the lowest priceslowest prices

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What are criticisms of What are criticisms of a market economy?a market economy?

•lack of competitionlack of competition•externalitiesexternalities•lack of public goodslack of public goods•income inequalityincome inequality

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What is aWhat is amixed economy?mixed economy?

•An economic system An economic system that answers the basic that answers the basic questions through a questions through a mixture of traditional, mixture of traditional, command, and market command, and market systemssystems

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What is capitalism?What is capitalism?•An economic system An economic system characterized by characterized by private ownership of private ownership of resources and marketsresources and markets

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What isWhat isconsumer sovereignty?consumer sovereignty?•The freedom of The freedom of consumers to cast their consumers to cast their dollar votes to buy, or not dollar votes to buy, or not to buy, at prices to buy, at prices determined in competitive determined in competitive marketsmarkets

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What kind of system What kind of system does the U.S. have?does the U.S. have?•No nation in the world No nation in the world precisely fits the two precisely fits the two criteria for capitalism, but criteria for capitalism, but the U.S. comes closethe U.S. comes close

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What is socialism?What is socialism?•An economic system An economic system characterized by characterized by government ownership of government ownership of resources and centralized resources and centralized decision makingdecision making

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Who was Karl Marx?Who was Karl Marx?•His criticism of capitalism His criticism of capitalism advanced communismadvanced communism

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What two books did What two books did Karl Marx write?Karl Marx write?

•The Communist The Communist Manifesto,Manifesto, 1848 1848

•Das Kapital,Das Kapital, 1867-1885 1867-1885

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What is communism?What is communism?•A stateless, classless A stateless, classless economic system in which economic system in which the factors of production the factors of production are owned by everyone, are owned by everyone, who share in accordance who share in accordance to their needsto their needs

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What are What are characteristics of characteristics of

socialism?socialism?

•public ownershippublic ownership•centralization centralization

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What are the What are the strengths of strengths of socialism?socialism?

•an equitable distribution an equitable distribution of incomeof income

•rapid growth is possiblerapid growth is possible•no unemploymentno unemployment

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What are What are weaknesses of weaknesses of

socialism?socialism?

•inefficienciesinefficiencies•stifles growthstifles growth

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A Classification of Economic SystemsA Classification of Economic Systems

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How is Cuba How is Cuba in transition?in transition?

•Despite limited free Despite limited free market reforms, Cuba market reforms, Cuba remains essentially a remains essentially a communist systemcommunist system

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How is Russia How is Russia in transition?in transition?

•Privatization plans are Privatization plans are being implemented and being implemented and steps are continuing to steps are continuing to create a dynamic create a dynamic capitalist economycapitalist economy

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How is China How is China in transition?in transition?

•China is a market of China is a market of great profit and promise great profit and promise as it continues its as it continues its transition from transition from communism to capitalismcommunism to capitalism

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