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Microeconomics

o
o

Macroeconomics

Individual Consumers and Firms.


The demand and supply of individual
goods and services.

Demand depends on:


o

Consumers
expectations
the future.

o
o

The Overall Economy.


The aggregate demand and aggregate
supply for all goods and services.

Supply depends on:

Aggregate demand depends Aggregate supply depends on:


on:

Expectations of profits by
firms.

Households expectations
of the future.

Producers expectations of
future profits.

of

The price of the


product
in
question.

The price of the good or


service in question

Interest rates.

Productions costs.

Household income
available.

Technology.

Household income.

Economic growth.

Household
accumulated
wealth.

Costs of production.
o Labor
o Raw materials.
o Other inputs.

Household wealth.

Public policy:
o Business tax rates.
o Regulation
or
deregulation.
o Environmental policies.

Consumer tastes
and preferences.

Business
subsidies.

Taxes and tariffs.

Business taxes.

The price of other


products.

Price of related goods.

Consumer indebtedness.

Weather.

The number of
households
demanding a good
or service.

The
number
suppliers.

The
number
consumers.

The number of firms.

Demand
goods.

World
demand
domestic goods.

Exchange rates.

taxes

Microeconomics

and

of

for

of

foreign
for

Macroeconomics

Equilibrium occurs when the quantity


demanded
equals
the
quantity
supplied.

Equilibrium in an economy occurs


when the aggregate demand equals
the aggregate supply.

There is a price for each good or


service that will clear the market.

There is a price level in an economy at


which the aggregate demand will
equal aggregate supply.

In macroeconomics:
o There are no:
o Substitute goods or services.
o Complimentary goods and services.
o Normal goods and services.
o Inferior
goods
and
services
=>There are just aggregate goods and
services.
o Ceteris paribus is not an issue in macroeconomics.
o We do not care why consumers make individual
choices. We are not concerned with:
o Price elasticity of demand.
o Budget constraints of consumers.
o Marginal utility of consumers.
o Firms (producers) are simply firms (producers).
We do not worry about whether a firm is:
o A perfect competitor.

o
o
o

o A monopolist.
o In monopolistic competition.
o An oligopolist.
We do not concern ourselves with the size or
behavior of the firm in macroeconomics.
We still emphasize the concept of opportunity
costs, but we now apply that concept to whole
economies or societies.
You will not hear the phrases marginal cost or
marginal revenue. These two concepts are not
an issue in macroeconomics.

Allocative Efficiency
Definition of allocative efficiency. This occurs when there is an optimal
distribution of goods and services, taking into account consumers
preferences.
A more precise definition of allocative efficiency is at an output level where
the price equals the Marginal Cost (MC) of production. This is because the
price that consumers are willing to pay is equivalent to the marginal utility
that they get. Therefore the optimal distribution is achieved when the
marginal utility of the good equals the marginal cost.
Example using diagram
If the marginal cost was 10, and
people were only willing to pay 5
for the good (at output 5), this is
allocatively inefficient. This is
than the cost of producing. The
inefficient.
and the price was 10 . The price
suggesting under-consumption. If
would benefit from enjoying more

because the value people get (2) is less


cost is greater than the benefit and it is
If the marginal cost of a good was 5,
(MU) is greater than marginal cost
output increased and price fell, society
of the good.
Allocative efficiency occurs at an output
Perfect competition

allocatively

of 8.
efficient
Firms in perfect competition are
said to produce at an allocative
efficient level because at Q1

P=MC
Monopolies allocatively inefficient
Monopolies can increase price above the marginal cost of
production and are allocatively inefficient. This is because
monopolies have market power and can increase price to reduce
consumer surplus.
Monopoly sets a price of Pm. This is allocatively inefficient because
Price is greater than MC.
Alloactive efficiency would occur at the point where the MC cuts the
Demand curve so Price = MC.

Allocative efficiency and productive efficiency


Productive Efficiency is concerned with producing goods with lowest cost. This occurs on the production possibility frontier
(PPF).
(Note producing on the production possibility frontier is not necessarily allocatively efficient because a PPF only shows the
potential output. Allocative efficiency is concerned with the distribution of goods and this requires the addition of
indifference curves.
Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce
maximum output for the minimum cost.
To be productively efficient means the economy must be producing on its production possibility frontier. (i.e. it is
impossible to produce more of one good without producing less of another).

Points A and B are productively efficient.


Point C is inefficient because you could produce more goods or services with
no opportunity cost
A firm is said to be productively efficient when it is producing at the lowest point
on the average cost curve
(where
Marginal
cost
meets average cost).
Productive efficiency is
closely related to the
concept
of
Technical
Efficiency. A firm is
technically efficient when it
combines
the
optimal
combination of labour and capital to
produce a good. i.e.
cannot produce more of a good, without
more inputs.
Note: An economy can be productively
efficient but have very
poor allocative efficiency.
Allocative efficiency is concerned with
the optimal distribution of
resources. For example, if you devoted
90% of GDP to defence,
you could be productively efficient, but,
this would be a very
unbalanced economy.
1. Economics affects everyone
Economics is applicable in a wide range of fields,
Economics is about choice and is at the heart of all
including business, finance, administration, law, local
decision-making.
Individuals,
businesses
and
and national government and, indeed, most aspects of
governments are all faced with making choices in
everyday life. In studying Economics you will examine
situations where resources are scarce. As a result,
topics of obvious importance to human well-being.

Increasingly, policy debate in all areas is being cast in


economic terms and understanding most current issues
requires an understanding of Economics.
2. Economics as an intellectual discipline develops
a valuable set of skills
Economics is valuable not only for the topics it studies,
but also for its methods of analysis. The processes
economists use in constructing models, analysing
arguments and testing empirical predictions against
available evidence develop several important skills.
Economics graduates develop their general literacy,
communication and numeracy skills, as well as skills of
abstraction (balancing simplification against relevance),
logical deduction (including precise use of language, for
example in relation to cause and effect, necessity and
sufficiency) and critical thinking. Skills of discrimination,
flexibility and organisational ability are also enhanced.
Learning Economics gives insights into the general
environment
of
resource
allocation
decisions,
opportunity costs and project evaluation that are crucially
important in many areas. Often these insights are not at
all obvious, and can be counter-intuitive, to those who
don't
apply
economic
reasoning.
3. An Economics training is a good basis for getting
a job
Because of the wide range of skills required and
developed, a training in Economics (especially to degree
or Honours level) opens up many diverse career
opportunities for a graduate.
Because the skills acquired in studying Economics are
transferable, Economics graduates get a wide variety of
jobs, not just as economists. In the current environment,
transferable skills and flexibility, together with strong
personal characteristics, tend to be more important than
specific training in a narrow vocational area. Employers
are particularly keen on graduates with good analytical
and problem-solving skills, which are emphasised in
training in Economics.
Perhaps because Economics graduates do not all end
up with careers specifically as professional economists,
there is sometimes a mistaken perception that
employment prospects for Economics graduates are not
as favourable as for some other commerce subjects.
However,
information
on
university
graduate
employment (e.g. New Zealand Vice-Chancellors'
Committee, University Graduate Destinations, annual
reports) shows that the percentage of graduates
successful in securing positions is similar.
In recent years Otago Economics graduates have found
employment in a tremendously wide range of niches,
both in the private and public sectors.
Economic problems are an ever-present and inherent
part of our lives: the existence of high levels of
unemployment, global competition in world markets,
arguments about the wisdom of free trade agreements,
the merits of alternative pollution control policies, and the
Bank of Canada's forceful endeavours to restrain
inflation. While many issues are fundamentally economic
in nature, there are many other social, political and
environmental problems that have important economic
consequences. The social science of economics is our
attempt to analyze and understand these and many

Who consumes the goods & services


produced in society?
For whom? is a public choice question. All
economic systems must determine which goods
and services will be available for public use and
which for private use.

other problems. More formally, economics is concerned


with the material well-being of human societies. It is
often described as the study of how we use our limited
resources to satisfy our unlimited material wants. An
extensive body of analysis has developed to do that.
There are many reasons for studying economics. First,
economics is essential to understanding the world in
which you live and work. What determines the prices of
the goods and services on which you spend your
income, and the prices of the stocks and bonds in which
you invest your savings? How does education affect the
lifetime earnings of people? Why do some people earn
so much and others so little? Why do some jobs pay
high wages while other jobs pay low wages? How do
firms operating in different market environments decide
what quantities to produce of their product outputs, what
prices to charge for these outputs, and what quantities of
labour and capital inputs to employ? How can economic
analysis help us understand and solve the problems of
environmental pollution and resource depletion? What
determines the level of national income and aggregate
employment, the rate of price inflation, the rate of
unemployment, the rate of growth of aggregate output
and productivity, and the international value of the
Canadian dollar? Why do average standards of living
vary so widely among and within countries?
A second reason to study economics is that it can equip
you to participate more successfully in the increasingly
knowledge-based and interdependent global economy of
the twenty-first century. Economics is fundamentally
about choice behaviour -- about how individuals,
families, firms and governments deploy their scarce
resources so as to maximize the economic well-being of
their stakeholders. How do individuals decide how much
of their time to devote to paid work, how much and what
kinds of formal education to acquire, how much of their
incomes to spend and save, how to allocate their
spending among the vast array of consumer goods and
services, how to invest their savings, and how much to
invest in home ownership? By systematically addressing
these sorts of questions, economics can help individuals
make better purchasing, employment and financial
decisions. And by providing in-depth analysis of firms'
decision-making in a variety of market settings,
economics can help business managers and executives
make better production, employment and investment
decisions.
A third reason to study economics is that it can give you
a better understanding of the objectives, methods and
limitations of government economic policy. How can
government policy help reduce environmental pollution?
How does the tax system affect the incentives for people
to work, for families to spend and save, and for firms to
invest? How do government budget deficits and debt
affect the economy? What are the effects of freer
international trade on Canadians' standard of living?
How do the actions and policies of the Bank of Canada
affect interest rates and the money supply, and thence
the rate of price inflation, the external value of the
Canadian dollar, and international capital flows? How
can governments enhance the competitiveness of
domestic markets and the international competitiveness
of Canadian firms? Can Canada afford in their present
form the country's large social welfare programs such as
Medicare and the Canada Pension Plan?

What goods & services should be produced?


What to produce? is an allocation question. All
economic systems must determine how to
allocate productive resources in the form of land
(natural resources/raw materials), labor (work
for which we earn pay) and capital (human education & job training) (physical buildings,
equipment & tools).

How should goods & services be produced?


How to produce? is an efficiency question. All
economic systems must determine how goods
and services will be produced.

How do different economic systems respond to the 3


Key Economic questions? First of all, we need to define
exactly what an Economic System is:

The institutional framework of formal and


informal rules that a society uses to
determine
what to produce, how to produce and how to
distribute goods and services.
Another, more popular term for economic system is
economy. An economy, or economic system, is the
structural framework in which households, businesses,
and governments undertake the production and
consumption decisions that allocate limited resources to
satisfy unlimited wants and needs.
An economic system is primarily characterized
by its key institutions, especially those relating to the
ownership and control of resources and the means of
production. Two real-world economic systems that differ
based on key institutions are capitalism and
communism. Capitalism is an economic system in which
ownership and control is largely in private hands
(businesses and households), as opposed to public
hands (government). One of the key institutions
underlying capitalism is private property rights.
Communism, in contrast, is an economic system in
which ownership and control predominately rests with
government. Socialism is a third noted economic system
that borrows institutions from both capitalism and
communism.
Economic systems can be categorized
according to who makes most of the decisions in an
economy. Most economies can generally categorized as
one of two kinds:
Market Economy
An economy that relies on a system of
interdependent market prices to allocate
goods,
services,
and
productive
resources and to coordinate the diverse
plans of consumers and producers, all
of them pursuing their own self-interest.
Command Economy
An economy in which most economic
issues of production and distribution are
resolved through central planning and
control.
So, how do different economic systems respond
to the three basic economic questions? In a socialist or
command system, the central authority determines what,
how, and for whom goods and services will be produced.
A Mixed System incorporates elements of both
command and market systems in determining answers
to the three questions. Mixed economies with strong
market components also include a public goods and
services sector, just as command economies like Cuba
include a private goods and services sector.

In a market economy, most of the


decisions in the economy about what to
produce, how to produce it and who
receives it are made by individuals and
firms.

At the other end of the spectrum:

In a command economy, government


officials make most of the decisions in
the economy about what to produce,
how to produce it and who receives it.

Most economic systems also contain elements


of tradition or repeating decisions in ways made at an
earlier time or by an earlier generation. Today, nearly all
economies are actually mixed, in that some economic
decisions are made by individuals and private firms, but
some are also made by government officials, either
through rules and regulations or through governmentowned firms.
The U.S. economy leans toward the marketoriented side of the spectrum. An economy like Cuba or
North Korea is near the command economy side of the
spectrum. But the dividing line between market and
command economies in most nations is blurry rather
than bright.
Market Economies (Capitalism)
Capitalism is undoubtedly at the top of any list of
economic systems operating in the modern world. This
system is based on: (1) private property--private
ownership of resources and the means of production, (2)
individual liberty--relative freedom on the part of the
resource owners to use their resources as they see fit,
and (3) competitive markets--a system of relatively
competitive markets.
Under capitalism, governments establish the basic rules
of the game and are responsible for the production of
public goods, but the vast majority of resource allocation
decisions are undertaken by individuals, as either
consumers or producers. The United States is one of the
more noted examples of capitalism. However, most
modern industrialized economies of Europe, Asia, North
America, and South America operate under capitalism.
Command Economies (Socialism)
In theory, socialism is the transition between capitalism
and communism and is based on: (1) government
ownership of resources and the means of production, (2)
worker control of government, and (3) income distributed
according to needs. As practiced in the real world,
socialism is an economic system based on (1)
nationalized industries--government ownership and
control of key industries and (2) central planning-relatively detailed, but not comprehensive, resource
allocation decision making by the central government.
Under real world socialism, governments exert extensive
control over resource allocation decisions, primarily
involving key industries such as transportation, energy
production, communication, and health care. While
Sweden exemplifies modern socialism, several
European nations have practiced varying forms of
socialism over the decades.
Command Economies (Communism)
In theory, communism is an economic system based on:
(1) a classless society, (2) common ownership of
resources, (3) no government, and (4) income
distributed according to needs. As practiced in the real
world, communism is an economic system based on (1)
government ownership--government ownership and
control of most resources and the means of production
and (2) central planning--excruciatingly detailed and
comprehensive resource allocation decision making by
the central government.
Under real world communism, governments undertake
the vast majority of the resource allocation decisions,
with few decisions undertaken by individuals. The former
Soviet Union was the primary example of real world
communism before if disbanded in the late 1980s.
China, Cuba, and a scattering of African nations
continue to operate under various forms of communism.

Two Pure Extremes


Capitalism, communism, and socialism are three realworld economic systems that exhibit varying degrees of
decision making by individuals and governments and are
part of a continuum bounded by two theoretical
extremes--pure market economy and pure command
economy.
A pure market economy is an idealized economy that
relies exclusively on decisions made through markets to
allocate resources. A pure command economy is an
economy that relies exclusively on decisions by
governments to allocate resources. Neither type of
economic system currently exists in the world, nor has
either ever existed. Both ideals are best considered
benchmarks that can be used for comparison. The key
word that makes each a theoretical extreme is
"exclusively." Real world economic systems rely on
both markets and governments to allocation
resources. While some real world economic systems
come close to one extreme or the other, they never
actually reach the ideal.
Every country in this world has its own economic to
develop their country and to rich their country. Each
country has their own economic goals to improve their
economic conditions. There are four major economic
goals are price stability, economic growth faster than
population growth, low unemployment of resources and
equitable distribution of income and wealth. Every
country, through its government, will endeavour to
achieve this economic. It is very importance for every
country to achieve these economic goals. By achieving
this goals, the country economic will be stable and will
develop the country. Moreover, more foreign investor will
invests in their country if the countries economic is
stable and good.
CONTENT
Price stability is one of the importance economic goals
that every country must achieve. What is price stability?
Price Stability is the economic term used to refer to a
situation where the general price level covering
consumer goods remains unchanged or if it does
change, it happens at a low rate so that it is not strong
enough to make any significant influence on economic.
In other word, price stability is the minimum fluctuations
in the price of goods and services. Price stability is also
a situation in which prices in an economy dont change
much over time. In the market economy, price changes
are a common phenomenon depending on the demand
for and supply of goods and services. It is not common
for an economy to have price stability. Price stability
would mean that an economy would not experience not
experience inflation and deflation. Every country has to
maintain their price stability to minimise drastic price
changes, to prevent inflation and to maintain the
purchasing power of its currency. For example, if the
price of the sugar increases, the consumer maybe will
not buy the sugar. If the price of a goods and services
keep increases and price is not stable, it will lead a
country to inflation.
What is inflation? Inflation is a rise in the general level of
prices of goods and services in an economy over a
period of time. When the price level rises, each unit of
currency buys fewer goods and services; consequently,
annual inflation is also an erosion in the purchasing
power of money. Purchasing power of money is a loss of
real value in the internal medium of exchange and unit of
account in the economy. Inflations effect on an economy
can be simultaneously positive and negative. Negative
effects of inflation include a decrease in the real value of
money and other monetary items over time meanwhile
the positive effects of inflation include a mitigation of
economic recessions, and debt relief by reducing the
real level of debt. It is every important for every country
to achieve this economic goal. Every country has to
maintain its price stability of goods and services to avoid

inflation and to avoid the country into debt. Achieving


and maintaining a low and a stable inflation is a
foundation for many of the economic and social
objectives that most people would want to see
achieved?
Economic Growth Faster Than Population Growth
Economic growth is needed to spur the people and to
improve their standard of living, which is determined by
the ratio between economic growths over population
growth. Standard of living is a generally measured by
standards such as real, example like inflation adjusted
income per person and poverty rate. Economic growth is
a positive change in the level of production of goods and
services by a country over a certain period of time.
Economic growth is usually brought about by
technological innovation and positive external forces.
What is population growth? Population growth is the
change in a population over time, and can be quantified
as the change in the number of individuals of any
species in a population using "per unit time" for
measurement. If a countrys population growth grows
faster than the economy, then there will be a decline in
living standards and this will lead to many social and
economic problems like inflation. If the population of a
country increases, the country has also to increases it
economy. The government have also need to increases
the price of goods and services, therefore people has to
pay more than the original price for a certain product.
People with fix income maybe could not afford or buy
lesser the product.
Therefore, the country economic have to grow faster to
support the increases population growth. If the
economics of the country increases and stable, the
government can support the increases population of the
country and also to develop the countrys economy.
Low Unemployment of Resources
Low unemployment of resources is a important to ensure
that available resources of a country is fully employed to
produce more goods and services. What is
unemployment? Unemployment describes the state of a
worker who is able and willing to take work but cannot
find it. The factors of production or productive inputs are
the resources employed to produce goods and services.
They facilitate production but do not become part of the
product as with raw materials or become significantly
transformed by the production process as with fuel used
to power machinery. There are four main factor of
production of low unemployment of resources which are
capital, land, labour, and entrepreneurship.
Capital is one of most important factor of production.
In economics, capital, capital goods,
or real
capital are factors of production used to create goods
or services that are not themselves significantly
consumed though they may depreciate in the production
process. Capital
goods may
be
acquired
with money or financial capital. Capital also generally
refers to saved-up financial wealth especially that used
to start or maintain a business. Land is one of the four
factors of production. In economics, land comprises
all naturally occurring resources whose supply is
inherently fixed. Land has comprised with different type
of natural resource like tin ore, gold, mineral resources
and many more. Natural resource also comprise of air,
water, wind and many more. Natural resources are
fundamental
to
the production of
all goods,
including capital goods. Labour is another factor of
production of low employment. In economics, labour is a
measure of the work done by human beings. Labour
also refer as human capital that are referring to the skills
that workers possess, not necessarily their actual work.
The last factor of production is entrepreneurship.
Entrepreneurship is the act of being an entrepreneur,
which is one who undertakes innovations, finance and
business acumen in an effort to transform innovations
into economic goods. Entrepreneurship is a individual

who is an entrepreneur can best be described as a risktaker. Entrepreneur is the person who identifies as a
need not met by the market as yet, new markets for
existing product and new process by which products can
be made.
High unemployment in a country will tend to have more
economic problems and social problems. Such problems
are, higher crime rates and corruption activities happen
as people may resort to illegal means to get money.
Other problem such as health problem and malnutrition
as since some people will not earn enough to eat or to
have a proper dish. Moreover, a high unemployment rate
generally indicates an economy in recession with few job
opportunities. The country must achieve these economic
goals because they has to minimise the high
unemployment. Low unemployment can increases the
country economics to achieve a stable economics.
Equitable Distribution of Income and Wealth
Distribution in economics refers to the way total output or
income is distributed among individuals or among the
four factors of production. These economic goals it is
important for every country to have a fair distribution of
economic and wealth among its people. The gap
between the rich and the poor in a country mist not is
great or big. An equitable distribution resource allocation
system has to be practice by the government of each
country.
Wealth in economics is the net worth of a person,
household, or nation, that is, the value of
all assets owned net of all liabilities owed at a point in
time. In economics, income is the flow that is, measured
per unit of time of revenue accruing to a person or nation
from
labour
services
and
from
ownership
of land and capital. This is a very important economic
goal for the government to achieve because it
encourage the less fortunate people to have education
and to able stand on their own feet. It also reduce social
problems such as theft, burglary, murder and many
more, if the people are educate and have a good job. It
is also to left people have fair chance in competing and
surviving in a rigid social world.
CONCLUSION
For a country to achieve a stable economic, they must
achieve all the four economic goals. These economic
goals cant be achieved by the government only, the
people of the country also have to contribute they part to
achieve all these goals. By achieving these goals, every
country can have a stable and a good economic and to
support the people of its country.
Question 2
The globalization structure today has created a tendency
which international trade has become an extremely
importance economic resource for most of the countries
in the world. Discuss how Malaysia has benefited from
international
trade.
Five conditions of the mixed economy, including full
employment, stability, economic growth, efficiency, and
equity, that are generally desired by society and pursued
by governments through economic policies. The five
goals are typically divided into the three that are most
important for macroeconomics (the macroeconomic
goals of full employment, stability and economic growth)
and the two that are most important for microeconomics
(the microeconomic goals of efficiency and equity).
A direct reflection of the scarcity problem is that human
beings have always sought ways to improve their lives
and living standards. On a society-wide basis these
actions are commonly guided by the pursuit of generally
accepted economic goals.
First consider the five goals in more detail.
Microeconomic Goals

Efficiency
Five Goals
and equity are the
two microeconomic
goalsmost relevant
to
markets,
industries,
and
parts
of
the
economy, and are
thus important to
the
study
of
microeconomics.
Efficiency:
Efficiency
is achieved
when
society is able to get the greatest amount
ofsatisfaction from
available
resources.
With efficiency, society cannot change the way
resources are used in any way that would
increase the total amount of satisfaction
obtained by society. The pervasive scarcity
problem is best addressed when limited
resources are used to satisfy as many wants
and needs as possible.
While
efficiency
is
indicated
by
equality
between demand price andsupply price for a given
market, there are no clear-cut comprehensive indicators
for attaining this efficiency goal. While it is possible, in
theory, to pinpoint what is needed for efficiency, the
complexity of the economy makes the task difficult to
accomplish in practice.
Equity:
Equity
is
achieved
when income and wealth are fairly distributed
within a society. Almost everyone wants a fair
distribution. However, what constitutes a fair and
equitable distribution is debatable. Some might
contend that equity is achieved when everyone
has the same income and wealth. Others
contend that equity results when people receive
income and wealth based on the value of
their production. Still others argue that equity is
achieved when each has only the income and
wealth that they need.
Equity means income and wealth are distributed
according to a standard of fairness. But what is the
fairness standard? It could be equality. Or it could be the
productive value of resources. Or it could be need.
Standards for equity moves into the realm ofnormative
economics.
Macroeconomic Goals
Full employment, stability, and economic growth are the
threemacroeconomic goals most relevant to the
aggregate economy and consequently are of prime
importance to the study of macroeconomics.
Full Employment: Full employment is achieved
when all available resources (labor, capital, land,
and entrepreneurship) are used to produce
goods and services. This goal is commonly
indicated by the employment of labor resources
(measured
by
the unemployment
rate).
However, all resources in the economy--labor,
capital,
land,
and
entrepreneurship--are
important to this goal. The economy benefits
from full
employment because
resources
produce the goods that satisfy the wants and
needs that lessen the scarcity problem. If the
resources are not employed, then they are not
producing and satisfaction is not achieved.
Stability: Stability is achieved by avoiding or
limiting fluctuations in production, employment,
and prices. Stability seeks to avoid the
recessionary
declines
and
inflationary
expansions of business cycles. This goal is
indicated by month-to-month and year-to-year

changes in various economic measures, such as


the inflation rate, the unemployment rate, and
the growth rate of production. If these remain
unchanged, then stability is at hand. Maintaining
stability is beneficial because it means
uncertainty and disruptions in the economy are
avoided. It means consumers and businesses
can safely pursue long-term consumption and
production plans. Policy makers are usually
most concerned with price stability and the
inflation rate.
Economic Growth: Economic growth is achieved
by increasing the economy's ability to produce
goods and services. This goal is best indicated
by measuring the growth rate of production. If
the economy produces more goods this year
than last, then it is growing. Economic growth is
also indicated by increases in the quantities of
the resources--labor, capital, land, and
entrepreneurship--used to produce goods. With
economic growth, society gets more goods that
can be used to satisfy more wants and needs-people are better off; living standards rise; and
scarcity is less of a problem.
Tradeoffs
The five economic goals of full employment, stability,
economic growth, efficiency, and equity are widely
considered to be beneficial and worth pursuing. Each
goal, achieved by itself, improves the overall well-being
of society. Greater employment is typically better than
less. Stable prices are better than inflation. Economic
growth is better than stagnation. Efficiency is better than
inefficiency. An equitable distribution is better than
inequality.
However, the pursuit of one goal often restricts
attainment of others. For example, policies that promote
efficiency might create unemployment or policies that
improve equity might limit economic growth.
Consider a few hypothetical situations, depicted by the
hypothetical Republic of Northwest Queoldiolia, in which
the pursuit of one goal limits achieving another goal.
Full Employment and Stability: The Central Bank
of Northwest Queoldiolia seeks to promote lower
rates of unemployment throughexpansionary
monetary policy. The economy expands,
unemployment falls, and full employment is
achieved, but inflation emerges from the over
stimulated economy.
Charac. Features
Mixed econ
1. Economic Freedom: individuals have the right to
choose
2. Competition: more than one producer of
good/services insures choice
1. Private Property: individuals have the right to
own their own property, including business
2. Self-Interest: individuals make
3.
decisions based on what is best for
them
4.
5. Voluntary Exchange: individuals may freely buy
and sell goods
6. Profit Motive: individuals are driven by a desire
to profit (make money)
7.
Command econ
8.
Government regulation of some
practices
Ex. Wages, labor hours,
safety practice.
1. Government limits certain choices

business

Efficiency and Equity: The Congress of


Northwest Queoldiolia seeks to address
historical ethnic inequities by establishing an
affirmative action program. Opportunities for
ethnic minorities provided by the program
enable more equal distributions of income and
wealth, but efficiency is prevented because
some of the employed workers are less skilled at
their jobs.
Economic Growth and Full Employment:
Seeking to keep pace with economic growth in
neighboring
Southeast
Queoldiolia,
the
President of Northwest Queoldiolia enacts an
intense program of scientific research and
development. The program bears ample fruit,
creating scores of new technological innovations
that lead to high rates of economic growth, but
implementation of the innovations disrupts the
economy by throwing millions of people who
lack the necessary skills or training needed by
the new technologies out of work.
Policies and Politics
The pursuit of these five economic goals is inherently an
act of normative economics. In fact, the normative part of
normative economics is based on the word "norm" which
is synonymous with the word "goal." Normative
economics is essentially the pursuit of economic goals.
In a mixed economy, the pursuit of these goals is largely
directed by governments. This, of course, brings into
play the wonderful world of politics and never-ending
debates over which of these five goals is most worth
pursuing with economic policies.
As the discussion turns to politics and policies, two
viewpoints tend to emerge--liberal and conservative.
Generalities are, of course, fraught with exceptions.
However, with that caution in mind, each of the two
political views have historically placed greater emphasis
on the attainment of some goals over others.
On the macroeconomic side, liberals have tended to
seek full employment over stability and economic
growth. Conservatives, in contrast, have sought
economic growth and stability, especially price stability,
more so than full employment. On the microeconomic
side, liberals have tended to prefer equity over efficiency
and conservatives have usually preferred efficiency over
equity.

Ex. Cannot buy or produce certain


goods/services
2. Government provides aid to the needy
Ex. Medicare, Medicaid, welfare
A traditional economy is defined by three characteristics:
1. It is based on agriculture, fishing, hunting,
gathering or some combination of the above.
2. It is guided by traditions.
3. It may use barter instead of money.
For these reasons, people who live in a traditional
economy appear to be living in poverty , even if their
daily needs are being met.
Most traditional economies operate in emerging markets,
or the Third World countries. They are usually located in
Africa, Asia, Latin America and the Middle East.
However, pockets of traditional economies can be found
throughout the world.
It is generally thought that all other economies got their
starts as traditional economies. Likewise, it is generally
expected that a traditional economy will evolve into
either a market, command or mixed economy.
Characteristics of a Traditional Economy
At its most basic level, a traditional economy exists in a
hunter/gatherer and nomadic society. These groups live
in families or tribes, and cover wide areas to find enough
food to support them. They follow the herds of animals

that sustain them. They may also move to follow the


seasons, whether it's winter/summer or wet/dry season.
At the next level, hunter/gatherers find a fertile area they
can cultivate, and become farmers. They can support
more people using fewer resources. This allows them to
erect permanent structures, and trade with other groups
instead of competing for resources.
Since traditional economies center around a family or
tribe, it is easy to use traditions gained from the
experience of the elders to guide day-to-day life.
Economic decisions are based on these traditions.
Nomadic hunter/gatherers usually compete with other
groups for scarce natural resources. There is little need
for trade, since they all consume and produce pretty
much the same things. There may be trade between
groups that don't compete, such as between one that
relies on hunting comes across a group that relies on
fishing, for example. In these cases, metal coins wold be
heavy to carry and not really needed. However, once
they started farming and settled down, the groups
created some form of money to make trade over long
distances easier.
When traditional economies in the modern world interact
with market or command economies, cash takes on a
more important role. Cash enables those in the
traditional economy to purchase better equipment to
make their farming, hunting or fishing more profitable.
Traditional Economy Advantages
Since traditional economies rely on custom and tradition,
the distribution of resources is usually well-known.
Everyone knows their role in production, and what they
are likely to receive. Traditional economies are usually
less destructive to the environment, and are therefore
sustainable.
Traditional Economy Disadvantages
Traditional economies are very vulnerable to changes in
nature, especially the weather. For this reason,
traditional economies limit population growth. When the
harvest or hunting is poor, people starve. They are also
more vulnerable to market or command economies that
have superior resources to wage war or take away
needed natural resources. For example, Russian oil
development in Siberia has damaged streams and the
tundra, reducing traditional fishing and reindeer herding.
In a Command Economy or Planned Economy, the
central or state government regulate various factors of
production. In fact, the government is the final authority
to take decisions regarding production, utilization of the
finished industrial products and the allocation of the
revenues
earned
from
their
distribution.
The government-certified planners come second in the
hierarchy. They distribute the works among the labor
A command economy is where economic decisions are
planned out in detail by a central government authority.
The plan is implemented through laws, regulations and
directives. Businesses follow production and hiring
targets instead of individually and freely responding to
the laws of supply and demand. Central planners seek to
replace the forces that operate in a free market
economy, and the customs that guide a traditional
economy, to attain specific societal goals.
The concept of a command economy was developed by
Viennese economist Otto Neurath as a method to control
the hyperinflation after World War I. The phrase comes
from the German "Befehlswirtschaft" and was initially
used to describe the Nazi economy. However, centrally
planned economies were in existence before then,
including the Incan empire in 16th century Peru, the
Mormons in 19th century Utah, and even the U.S. during
World War II mobilization. (Source: Richard Erickson
and Barry Ickes, Review of Economic Design, A Model
of Russia's Virtual Economy, 2001, 6, 185-214.)
Characteristics of a Command Economy

class, who actually undergo the toiling part of the entire


process. China and former USSR and are perhaps two
of the best instances of Command Economy. Though
many countries now-a-days are switching off from
Planned Economy to Market or Mixed Economy, yet
nations like North Korea and Cuba are some countries
where Planned Economy still exists in full form.
In case of a Command Economy, both state-owned
and private enterprises receive guidance and directives
from the government regarding production capacity,
volume, modes of production and course of their actions.
Planned economic system is broadly segregated into
two groups Centralized and Decentralized. The
centralized or centrally Planned Economy, as prevalent
in former Soviet Union, is a more familiar concept
between the two. The decentralized Command
Economy, on the other hand, is more theoretical in
nature with little or no application in the actual economic
spheres.
Characteristic features of Command Economy:
guaranteeing constant exploitation of the existing
resources. It is least affected by financial downturns and
inflations.

both surplus production and unemployment rates remain


at
a
reasonable
level
steady nature of Planned Economy encourages
investments
in
long-standing
project-related
infrastructures without any possibility of financial
recessions.

Market Economy, with respect to the basic moneymaking approaches. While Market Economy tends to
multiply the wealth of a nation through the gradual
process of evolution, Command Economic system
prefers deliberate planning of the entire money-making
process for better results. In fact, such sincere economic
planning in the long run proves beneficial to improve the
economic
conditions
of
a
country.

benefits, rather than the requirements of a single


individual. Under such circumstances, rewards, wages
and other monetary benefits like bonus are distributed
on the basis of the joint rendering of services. This is
how Planned Economy actually eradicates the profitmaking at individual levels.

A modern centrally planned economy can be identified


by the following five characteristics:
1. The government creates a central economic plan for
all sectors and regions of the country. It typically starts
with a five-year plan to set the overriding economic
goals. This is broken down into shorter-term plans to
convert the goals into actionable objectives. The goal of
the five-year plan is to generate robust economic growth,
increase production efficiency and best utilize scarce
resources. For the most part, a command economy
needs a political system that is also centrally planned.
2. The government allocates all resources according to
the central plan. The goal is to use the nation's capital,
labor and natural resources in the most effective way
possible. This pretty much eliminates unemployment by
promising to use each person's skills and abilities to their
highest capacity.
3. The central plan sets the priorities for production of all
goods and services. The goal is to supply enough food,
housing and other basics to meet the needs of everyone
in the country. In addition, it may have other priorities,

such as mobilizing for war or increasing the nation's


economic growth.
4. The government owns a monopolybusiness in
industries deemed important to the goals of the
economy. This usually includes finance, utilities, and
automotive. There is no domestic competition in these
industries.
5. The government creates the laws that regulate
economic activity. These include regulations, directives
and wage/price controls to implement the central plan.
(Source: Bon Kristoffer G. Gabnay, Roberto M Remotin,
Jr., Edgar Allan M. Uy, editors.Economics: Its Concepts
& Principles. 2007. Rex Book Store: Manila)
Command Economy Advantages
Centrally planned economies are great at mobilizing
economic resources quickly, effectively and on a large
scale. They can execute massive projects, create
industrial power and attain imperative social goals. They
are able to override individual self-interest, and
subjugate the welfare of the general population, to
achieve a greater agreed-upon goal for the society at
large.
Command economies are also good at wholly
transforming societies to conform to the planner's vision,
as in Stalinist Russia, Maoist China and Castro's Cuba.
For example, the command economy in Russia built up
an effective military might and quickly rebuilt the
economy after World War II.
Command Economy Disadvantages
This rapid mobilization often means command
economies mow down other societal needs. For
example, workers are often told what jobs they must
fulfill and are even discouraged from moving. However,
people won't ignore their own needs for long. They often
develop a shadow economy, or black market, to buy and
sell the things the command economy isn't producing.
The efforts of leaders to control this market can
ultimately weaken support for the central planning
authority.
Instead of leading to efficiency, command economies
often produce too much of one thing and not enough of
another. That's because it's difficult for the central
planners to get up-to-date information about consumers'
needs. In addition, prices are set by the central plan, and
so can't be used to measure or control demand. Instead,
rationing often becomes necessary.
Command economies are not good at stimulating
innovation. Businesses are focused on following
directives, and are discouraged from making any
autonomous decisions.
Centrally planned economies also have trouble
producing the right exports at global market prices. It's
difficult for the various planning sectors to coordinate
with each other, not to mention foreign countries' needs.
Command Economy Examples
Cuba, North Korea, China, Russia and Iran are the most
commonly
referenced
examples
of
command
economies. Russia's Gosplan has been the most
studied. It was also the longest running, lasting from the
1930s until the late 1980s. Article updated April 17,
2014
A market economy is where economic decisions are
made by the free market. That means production of
goods and services are regulated by the laws
of supply anddemand. Producers sell their goods and
services at the highest possible price that consumers are
willing and able to pay. Workers also bid their services at
the highest possible wages that their skills allow.
It is generally thought that any market economy got its
start as a traditional or command economy. However,
most societies in the modern world have elements of all
three, and are therefore mixed economies.
Characteristics of a Market Economy
A market economy is defined by six characteristics:

1. Private Property -- Most goods and services are


privately-owned. This allows the owners to make legally
binding contracts to buy, sell, lease or rent their property.
In other words, their property gives them the right to
profit from ownership. However, there are exclusions to
what is considered private property. For example, since
1865 the U.S. does not allow you to buy and sell other
people, or even yourself. This includes your own body or
body parts. (Source: University of Auburn, Market
Economy)
2. Freedom of Choice -- Owners, businesses,
consumers and workers are free to produce, sell and
purchase goods and services in a free market. Their only
constraint is the price they are willing to buy or sell for,
and the amount of capital they have.
3. Motive of Self-interest -- The market is driven by
everyone trying to sell their goods or services to the
highest bidder, while at the same time paying the least
for the goods and services they need. Although the
motive is selfish, it works to the benefit of the economy
over the long run. That's because this auction system
fairly prices all goods and services, accurately depicting
true supply and demand at any given point in time.
4. Competition -- The forces of competitive pressure
keeps prices moderate, and ensure that goods and
services are provided most efficiently. That's because,
as soon as demand increases for a particular item,
prices rise thanks to the law of demand. As competitors
see there is additional profit to be made, they start
production, adding to supply. This lowers prices to a
level where only the best competitors remain. This force
of competitive pressure also applies to workers, who are
competing with each other for the highest-paying jobs,
and consumers, who are competing for the best product
at the lowest price.
5. System of Markets and Prices -- A market economy is
completely dependent on an efficient market in which to
sell goods and services. In an efficient market, all buyers
and sellers have equal access, and the same
information upon which to base their decisions. Prices
rise and fall freely depending purely on the laws of
supply and demand.
6. Limited Government -- The role of government is
simply to ensure that the markets are open and working.
For example, it is in charge of national defense so no
other country can destroy the markets. It also makes
sure that everyone does have equal access to the
markets. For example, government exerts penalties
on monopolies, which unfairly restrict competition. The
government watches to make sure no one is unfairly
manipulating those markets, and that all information is
distributed equally. (Source: National Council on
Economic Education)
Market Economy Advantages
Since a market economy allows the free interplay of
supply and demand, it also ensures the most desired
goods and services are produced. That's because
consumers are willing to pay the highest price for the
things they want the most. Businesses will only produce
those things that return a profit.
Good and services are produced in the most efficient
way possible. The most efficient producers will receive
more profit than less efficient ones.
Innovation is rewarded. Producers who are innovative
will come up with more efficient methods of production.
Innovation of new products will meet the needs of
consumers in better ways that existing goods and
services. This innovation will spread to other competitors
so they, too, can be more profitable.
The businesses and individuals who are most efficient
and innovative will accumulate more capital. They can
invest this in other efficient and innovative companies,
giving them a leg up and leading to an overall higher
quality of production. (Source: Harper College,Pure
Capitalism and the Market System)

Market Economy Disadvantages


A market economy functions through competition.
However, there are many people in a society who are at
a natural competitive disadvantage, such as the elderly,
children, and mentally or physically challenged people.
In addition, the caretakers of those people are also at a
disadvantage, because their energies and skills are
taken up with caretaking, not competing. Thus, a society
based on a pure market economy must decide whether
it's in its larger self-interest to set aside resources to
make sure they get their needs met, or whether to let
them just fall by the wayside.
A market economy rewards those who are good at being
competitive. Therefore, the society reflects the values of
those people and organizations. This explains why a
market economy may produce private jets for some
while others starve and are homeless. (Source: Brown
University, Louis Putterman, Markets vs Controls)
Market Economy Examples
The U.S. is most commonly thought of the world's
premier market economy. One reason for its success is
the U.S. Constitution, which had many provisions that
facilitated and protected the market economy's six
characteristics. Here's the most important:
Article I, Section 8 protects innovation as a
property by establishing a copyright clause.
Article I, Sections 9 and 10 protects free
enterprise and freedom of choice by prohibiting
states from taxing each others' goods and
services.
Amendment IV protects private property and
limits government powers by prohibiting people
against unreasonable searches and seizures.
Amendment V protects the ownership of private
property, and Amendment XIV prohibits the
state from taking away property without due
process of law.
Amendments IX and X also limit the
government's power by reserving all rights not
specifically outlined in Constitution automatically
to the people.
The Constitution added in its Preamble a goal to
"promote the general welfare." This goal meant the
government could take a larger role than that purely
prescribed by a market economy. This led to many
social safety programs, such as Social Security, food
stamps and Medicare. (Source: James Dick, Jeffrey
Blais, Peter Moore, Civics and Government , Chapter
One, How Has the Constitution Shaped the Economic
System in the United States?) Article updated April 17,
2014
A mixed economy is a combination of market, command
and traditional economies. The United States is a mixed
economy because its Constitution protects the
requirements of a market economy, including ownership
of private property, limitations on government
interference, and promoting innovation. However, the
Constitution also encourages the government to promote
the general welfare. This allows the ability to effect a
command economy, where needed. In addition, many
American traditions still guide economic policy.
1. Mixed Economy
A mixed economy seeks to have all the advantages of a
market, command and traditional economy with little of
the disadvantages. Therefore, most mixed economies
have three of the six characteristics of the market
economy: private property, pricing and individual selfinterest.
Mixed economies also have a command economy in
certain areas. Most allow government to have a
command role in areas that safeguard the people and
the market itself. This usually includes themilitary,
international trade, and national transportation. An
increased governmental role depends on the priorities of

the people. Many mixed economies also allow


centralized planning and even government ownership of
key industries, such as aerospace, energy production
and even banking. Some mixed economies encourage
the
government
to
centrally
manage
health
care, welfare, and retirement programs.
In addition, most mixed economies follow traditions that
have been so ingrained that they may not even be aware
of it. For example, many mixed economies still fund and
give some power to royalty or emperors.
Most of the world's major economies are now mixed
economies. It would be difficult to avoid, thanks to
globalization. A country's people are best served through
international trade -- oil from Saudi Arabia, consumer
products from China, and food from the U.S. As soon as
businesses within a country are allowed or even
encouraged to export, the government must give up
some control to free market forces.
Second, the global economy is primarily free-market
based. There is very little government control, although
some regulations and agreements have been put into
place. However, there is no world government today that
has the power to override a country's sovereignty and
create a global command economy.
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2. Market Economy
The U.S. has the six characteristics of a market
economy. First, ownership of private property is
protected by law. Second, everyone is free to live, work,
produce, buy, and sell whatever they choose. Third, the
buying and selling of goods and services, including
employment, are driven by self-interest. Sellers try to get
the highest price, while buyers try to get the best value
for their money.
Fourth, competition is protected by law. Fifth, prices are
allowed to float freely. And sixth, the role of government
is primarily to make sure that the market is protected,
and that everyone has free access to it. This includes
regulations to make sure no one is unfairly manipulating
the market, and free press to ensure everyone has equal
access to information. 3. Command Economy
There are many aspects of the U.S. economy that follow
the characteristics of a command economy. First,
although there is no central economic plan, there is an
annual Federal budget that outlines the government's
priorities. This usually includes stimulating economic
growth. Second, resources are partially allocated
through the use of taxes, which discourage some
activities, and subsidies, which encourage other
activities. Third,government spending outlines the
priorities for the country. For example, U.S. military
spending increased after the 9/11 terrorism attacks.
Fourth, the government owns amonopoly in important
national industries. These include NASA, the interstate
highway system, and defense. Fifth, the Federal
government also uses laws, regulations and sometimes
wage/price controls to support economic priorities.
4. Traditional Economy
The U.S. is moving further away from a traditional
economy. However, many economic policies are still
guided by tradition. First, a traditional economy is based
on agriculture, hunting and fishing. U.S. agribusiness is
still supported by Federal subsidies, even though it is run
by a few global corporations. However, tradition dictates
that family farms be supported, even though there are
few farms left. The fishing industry is also supported by
laws and treaties. Although hunting is no longer needed
as a primary source of food for America, it's still
supported by laws and permits and celebrated in our
traditions.
5. Advantages of a Mixed Economy
A mixed economy can enjoy the advantages of a market
economy. First, it can efficiently allocate goods and
services where they are needed, by allowing prices to

measure supply and demand. Second, it also rewards


the most efficient producers with the highest profit,
ensuring that customers are getting the best value for
their dollar. Third, it encourages innovation that meets
customer needs more creatively, cheaply or efficiently.
Fourth, it automatically allocates capital to the most
innovative and efficient producers. They, in turn, can
invest the capital in more businesses like them.
A mixed economy also minimizes the disadvantages of a
market economy. A larger governmental role allows fast
mobilization in priority areas, such as defense,
technology or aerospace. Since a pure market economy
rewards those that are most competitive or innovative,
leaving others at risk, the expanded governmental role
can make sure these less competitive members are
cared for and valued.
6. Disadvantages of a Mixed Economy
A mixed economy can also take on all the disadvantages
of the other types of economies, depending on which
characteristics are emphasized. If it has too much free
market, it can reward the competitive members of
society and leave others without any government
support. Central planning might do extremely well in
mobilizing forces for defense, creating a governmentsubsidized monopoly or oligarchy system. This could
also put the country into debt, slowing down economic
growth in the long run. Businesses that are already
successful can lobby the government for more subsidies
and tax breaks. The government's role of protecting the
operation of the free markets might mean not enough
regulation, and ultimately taxpayer-funded bailouts of
businesses that took on too much risk. Article updated
October 3, 2014