Pure Centrally Planned Economy

§ All resources government-owned

§ Production coordinated by the central plans of government

§ Sometimes called communism

§ Use visible central planners

Problems with Centrally Planned Economies

ü Consumers get low priority

ü Little freedom of choice

ü Central planning can be inefficient

ü Resources owned by the state are sometimes wasted

ü Environmental damage

Mixed Economy

§ United States is a mixed economy

§ Also considered a market economy

§ Government regulates the private sector in a variety of ways.

Transitional Economy

§ A transitional economy is in the process of shifting orientation from central planning to competitive markets.

§ It involves converting state-owned enterprises into private enterprises—privatization.

§ The transition now under way will shape economies for decades to come.

Traditional Economy

§ A traditional economy is shaped largely by custom or religion.

§ Family relations also play significant roles in economic activity.

Production Possibilities Frontier

Efficiency and Production Possibilities Frontier

· PPF model

„ Shows possible combinations of 2 types of goods that can be produced when available resources are used fully and efficiently

„ Figure 2.1

· Inefficient and unattainable production

„ Point I and U on the curve

· Shape of the PPF

„ Any movement along PPF involves giving up something

The resources in an economy are not all perfectly adaptable. Law of increasing opportunity cost – each additional increment of one good requires the economy to give up larger increments of other good. The PPF has a bowed-out shape due to the law of increasing opportunity cost

Shifts in the PPF

· Economic Growth – an expansion in the economies ability to produce

· Changes in resource availability

„ Increase (more labor) – PPF shifts outward

„ Decrease (less resources) – PPF shifts inward

· Increases in stock of capital goods

· Technological change

Comparative Advantage

Absolute advantage – being able to do something using fewer resources than other producers require

Law of comparative advantage – the worker with the lower opportunity cost of producing a particular output should specialize in that output

Specialization– when individual workers focus on single tasks

Gains from specialization:

-More efficient and productive

-Absolute advantage focuses on who used the fewest resources, comparative advantage focuses on what else those resources could have produced

Exchange:

-Barter – system of exchange in which products are traded directly for other products

-Money – medium of exchange

Most people consume little of what they produce and produce little of what they consume! Division of labor– sorts the production process into tasks to be carried out by separate workers. Drawbacks of specialization (Figure 2.2)

Conclusion

An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions.

The resources in an economy are not all perfectly adaptable. Law of increasing opportunity cost – each additional increment of one good requires the economy to give up larger increments of other good. The PPF has a bowed-out shape due to the law of increasing opportunity cost

Control questions:

1. What does mean economic system?

2. What kind of economic system do you know?

3. What do you know about traditional economic system?

4. What do you know about production possibilities frontier

5. Can you give more information about law of comparative advantage?

Literature:

1. English for economists and managers: textbook/ O. V. Ulyanov, S. V. Grishin; yurginskiy technological Institute. – Tomsk: Publishing house of Tomsk Polytechnic University-theta, 2011. – 111 p.

2. Besanko D.A, Brauetugam R.R, Gibbs M.J Microeconomics,2011, Chicago

3. Griffiths A, Wall S.Economics for business and management,2011, England

4. Varian H.R. Intermediate microeconomics,2010, University of California at Berkeley

5. Boyd, W. Harper. Marketing Management.- Boston, 2010

Laws of market economy

The purpose: Solve and review the basic laws of market economy

Key words:market equilibrium, theory of demand, theory of supply, government intervention, individual demand, prices, sellers, outputs

Questions:

3.1 Theory of Demand

3.2 Theory of Supply

3.3 Market Equilibrium

3.4 Government Intervention in the Market

Theory of Demand

Demand for a commodity

— Depends on size of the market (Industry Demand for the commodity)

— Summation of Individual level Demand

Related to Consumer Choice Theory

Consumer Demand Theory Q_d= f (P_x, I, P_y,T)

Individual Demand

How are price and demand related for a good? (law of demand)

-Normal Goods

-Inferior Goods

Example: Suzuki Mehran

Effect of price of substitute and complementary goods. Effect of Change in Income and Tastes

Market Demand

Horizontal Summation of Individual Demand Curves. Negatively sloped, why? Inverse relation between price and quantity QD= F(Px, I, N, Py, T)

Bandwagon Effect and Snob Effect

Change in demand

Change in quantity Demanded

Demand Faced by A Firm

— Monopolist

ü WAPDA

— Perfect Competition

ü No true example exists (Small scale farmers producing homogeneous wheat in USA)

ü Horizontal demand curve, why?

— Oligopoly

ü Few firms with standardized or differentiated product

— Monopolistic Competition

ü Heterogeneous and differentiated products

— Factors effecting Demand

Advertising, Promotional Policies, Price expectations

— Firms selling durable goods face more volatile & unstable demand. Like automobiles, washing machines, water geezers

— Why? Consumers can wait for Availability of credit, or growth in economy

— Demand function faced by a firm

Q_D= a₀+a₁P_x +a₂I+a₃N+a₄P_y+ a₅T……………

— “a” is coefficient to be estimated with regression analysis

— Implications of estimated demand:

ü Types of inputs

ü Quantity of Inputs

Theory of Supply

Supply of a Commodity

— The quantity sellers are willing to sell at a given price level

— Depends on:

ü Price of the commodity

ü Prices of inputs

ü Technology

ü Opportunity cost

ü Future expectations

ü Number of sellers

Individual Supply

The higher the price, greater is the quantity sellers are willing to sell in the market (law of supply)

Effect of prices of inputs and changes in technology

Effect of prices of goods which can be produced with same inputs

Effect of changes in expectations of future

Market Supply

-Horizontal Summation of Individual Supply Curves

-Positively sloped, why?

-Positive relation between price and quantity

-Change in supply

-Change in quantity supplied

Market Equilibrium

Equilibrium exists when quantity sellers are willing to sell is equal to the quantity buyers are willing to buy at a given price.

— Surplus - Results in downward pressure on the price

— Shortage - Results in upward pressure on the price

— Impact of Changes in Demand on Market Equilibrium

— Impact of Changes in Supply on Market Equilibrium