Market Economy

What is a modified market economy? What factors have been responsible for the emergence of this kind of economic system? How do governments influence economic decision making in such systems? Use Australian examples to illustrate your answer. A modified market economy is a market economy in which there are varying amounts of intervention and property ownership by the government. The Australian economy would be classed as a modified market, as we have a certain degree of government intervention, and this is something we should feel lucky for in our country, because due to this we are able to experience the free, fair lifestyle which we enjoy. The emergence of this kind of economy is mainly due to weaknesses in the market economy which, without regulation, becomes an economy mainly concentrated on the wealthy people. The basic reason for the modified market economy is that the free market does not produce an efficient allocation of resources, and that the free market does not distribute output in a socially desirable way. For example in a modified market, the government regulate the flow an income a bit so that not only the rich make money. In a market economy the rich get richer and the poor get poorer as there is no regulation in terms of income distribution.

The intervention by the government, in forms such as social security nets, which is present in a modified market, makes society more evenly spread rather than everyone being one of two things, that is, very rich, or very poor. In such economies as these, the government influence economic decision making much to our advantage in terms of them providing many of the resources needed to satisfy collective wants, making restrictions upon what can and cannot be done, in the interests of our health, the environment, impacts upon society etc. Through this they regulate much of the possible ‘bad’ economic decisions that could be made. The Australian government does place some limitations on freedom of enterprise, but generally encourages private business activity as it is an advantage to our whole economic growth in terms of employment etc. The Australian government also encourages the idea of fair competition. To keep the consumer choice less restrictive the government might not allow certain take overs that may limit the number of choices available to the consumer. Competitive prices that come from businesses are also good for the economy in general, for example if an Australian owned company, such as Uncle Toby’s, can provide the same food as an American owned company at a competitive price, then consumers will tend to buy from the Australian company which keeps more our money in our country. Basically, the government intervention in economies such as ours, is all done to benefit our economy as a whole, to help even the distribution of income, to provide resource to help satisfy our unending collective wants. It is all done in an effort to make our country’s economy as efficient and all round satisfying, as possible. To make our country a prosperous and enjoyable place to live.

It is a cardinal truth that, in order to make the best possible use of the economic resources available in any economy, three basic decisions need to be taken – what to produce, how to produce and for whom to produce. The answers to these three fundamental questions are completely dependent to the extent of government’s interference in the economy. Based on the government’s role in the economy, the economic systems are divided into two major categories viz. market or capitalist economy and centrally planned or socialistic or command economy.

Market Economy and Centrally Planned Economy

The capitalist or market economic system emphasizes complete freedom of individuals as buyers and sellers through the price mechanism. In such a market, price of a commodity is based on market forces of demand and supply. The customers have complete freedom to make choices regarding their purchases and the producers, in turn, allocate their resources according to the respective demand. If the demand of a particular product increases, its price is expected to be increased initially and if the cost price remains the same as before, it will generate more profit for the producers.

Naturally, the producers will allocate more resources to that particular product. On the other hand, if the consumers are unwilling to bye a product, its price would fall, resulting in a lower profit or even loss to the producers. But the scenario is completely different in a centrally planned or command or socialistic economy. Here, the three major economic decisions – what to produce, how to produce and for whom to produce – are taken by the government. All major decisions regarding investment, savings and consumptions are practically governed by the central authority.

Thus, all the decisions, starting from the allocation of resources to the distribution of end products, are taken care off solely by the government. Unlike a capital market, efficiency in a centrally planned economy can only be achieved only when the demands are accurately estimated and the resources are allocated accordingly. The government fixes the output target for each state and industry and allocates the required resources accordingly. Legal Institution of Private Property vs. Social Ownership: In a market or capitalistic economy, all the properties and means of production belong to the private individuals.

The enterprises execute complete freedom and, as a result, the system is often called private enterprise economy. The land, building, machine and other articles of wealth in the country are owned by private firms. This is termed as system of ‘private property’. Social ownership of property is practically non-existent. But, the situation is completely different in case of a socialist economy. The basic feature of such an economic system is the social or government ownership of means of production such as, land, machine, mineral resources, capital etc.

The government allocates the resources according to the requirements and necessity of the nation as a whole, and not on individual preferences. Hence, property ceases to be a source of individual income. Privatization vs. Socialization: Capitalism preaches the freedom of enterprise which means that one is free to engage oneself in whatever economic activity according to one’s own will. Almost all the economic activities, except some limited number of services rendered by the government (like railways, defense etc. ), are left in the hands of private enterprise.

Trade, business and commence are absolutely free from state intervention and control. Business decisions, made by private owners, are ultimate. This is regarded as ‘freedom of enterprise’. In a centrally planned economy, the vital sectors of economy (like agriculture, industries, trade, commerce etc. ) are owned and governed by the government ownership and management respectively. Almost all the production processes are controlled either directly or indirectly by the government.

Freedom vs. Restrictions on Consumer Behavior:

In capitalistic system, consumers have the complete freedom regarding their consumption. Consumers are at full liberty to buy whatever products and services they choose and are able to afford. It is the consumers who dictate what are to be produced and in what quantities. This is referred to as ‘sovereignty of consumers’. The consumer is the dictator in such an economy. In socialist countries, the economic planning regarding ‘what to produce’ and ‘for whom to produce’ comes under the purview of the Central Planning Authority.

The goods and services are distributed among the people through the government agencies. All the decisions regarding the production of goods and services and distribution of end products are not based on individual tastes and preferences, but on national goals. Existence vs. Non-Existence of Price-Profit mechanism: In a market economy, efficiency in the economy is achieved only through profit-motive and there is no existence of price-control system in such an economy. When the prices rise, profits will usually follow suit, and the rising profit would induce the producers to expand their business.

Herein lies the existence of ‘invisible hand’ of price-profit mechanism which always maintains a balance between consumer’s demand and producers’ supply. Here, the price plays a major role in determining the equilibrium of demand and supply of products and services. The United States, Britain, France etc. can be regarded as capitalistic or market economies. On the other hand, in centrally planned economies, owing to government’s ownership and control on the production procedures, the price system ceases to provide an automatic control mechanism over the economic operations.

The elimination of the price system replaces the motive of private profit by that of social gain. In fact, social gain forms the basis of socialistic or centrally planned economy. Such an economy is based on the ideal of equal opportunities for all, equal distribution of income and wealth etc. The USSR was an example of such an economy. At present, China can be regarded as the best example of a centrally planned economy. Conclusion In fact, virtually all the economies are, to some extent, mixed in nature.

This is because, no socialistic economy is devoid of some private ownership, and capitalist economies invariably possess some Government-regulated enterprises. Even in the United States and Britain, both private and public sectors exercise their control over the functioning of the economy. However, while the capital planning has brought about an amazing development in some European countries in the last fifty years, the remarkable success and miraculous achievement brought by central planning in several Asian countries has strengthened the people’s confidence and interest in it.

Thus, it may be concluded that the private and public sectors should not be looked upon as two distinct entities within a same country; they are and must function as an integrated portion of the same organism.

References

Market Economy, Answers. com, http://www. answers. com/topic/market-economy

Mitra, J. K. Economics, An Introduction to its Basic Principles, 1968 Mukherjee,

S. Nature and Functions of the Economic System, Modern Economic Theory, Ed. 3, Wishwa Prakashan, London, 1996, pp. 50-53

Capitalist Economy, University of Minnesota, http://hrlibrary.umn.edu/edumat/sustecon/others/capitalist.htm

In free Market economy allocation of resources is left to market forces of supply and demand which also can be referred to as price mechanism. And the prices are determined as a result of the interaction of those market forces. Price mechanism enables the market to move to equilibrium, if left to act alone. When demand curve shifts to left due to a non-price factor such as change in tastes, the equilibrium price will increase. Increasing prices is the signal for the producers and shows the willingness and ability of consumers to buy it more.

This will serve as an incentive to producers to allocate their resources more on that specific product since now it is more profitable owing to its increasing prices. However, as the resources for that production is being used up more and more, they will become scarce eventually leading to shift of supply curve to the left which will push the prices up. This case corresponds to a downward movement along the demand curve as the price increase acts as a signal to consumer to lower their consumption.

Evaluate the proposition that government intervention in the market for Tobacco is justified. Tobacco is a demerit good which costs more than what people may be aware of. So if left to the market forces they are overproduced. Actual optimum level of output for tobacco is misled due to its negative externalities of consumption. When the figure is drawn according to the MPB (marginal private cost), the curve will reflect the benefits that are enjoyed only by the consumers of that product. Related article on methods of resource allocation

On the other hand, when we consider the third parties as well and draw the suitable MSB (marginal social cost) curve, it will be below the MPB curve which means that total benefit of tobacco to the whole society is less than its benefit to the private consumers. The distance between those curves will indicate the externalities of consumption. To prevent that type of market failure a government intervention could be useful. Government may choose either to impose indirect taxes to tobacco or use advertisements for deterrence.

First one will increase the cost of production shifting the MSC curve to left and the quantity produced will get closer to the optimum quantity. Second method will act on the consumer aiming for a change in their consumption habits which will shift the MPB (marginal private benefit) curve to right, closer to the MSB (marginal social benefit) curve. The optimum quantity of output will be achieved up to an extend depending on that shift. Although the picture depicted until that point might seem very optimistic for the government intervention, there are also many drawbacks of the same action.

First of all an intervention will hamper the natural functioning of the market force by itself. The incentives and signals will be rendered functionless. The vital role of consumers’ choice in allocation of resources will be disregarded mostly. Also extend of the act on consumers or producers is not easy to calculate and hard to hit the expected target to reach the optimality. Therefore the consequences might get out of the government’s control. In addition to these, a substantial decrease in the output of such a huge industry is likely to cause a big trouble in terms of unemployment.

Not only that specific industry of tobacco but also complementary industries will suffer from unemployment. When both the advantageous and disadvantageous are evaluated, government intervention is superior. This is because the main problem with it, unemployment, can be overcome in long run by well-directed policies to create proper jobs and secure a relevancy between the job vacancies and unemployed ones via training. On the other side bearing the drawbacks of having no intervention may not be affordable considering prospective market failure and social corruptions.

Tankers are usually vessels utilized in the process of transporting liquid materials such as oil or oil-derived commodities. Sometimes tankers may contain chemicals, foods, wine and other commodities. Consequently, the crude oil tanker freight market or the wet bulk freight market is the area where consumers and suppliers meet and conduct transactions. It should be noted that ‘area’ does not refer to a physical location but refers to the mechanisms which traders use to exchange commodities with one another. This market is composed of a series of suppliers who are usually ship owners. The consumers are made up of crude oil owners who want to transport their commodities to another location.

The deep-sea container freight market is composed of a series of vessels that transport commodities between various ports. It should be noted that deep-sea freight markets mostly deal with the transportation of manufactured goods to their respective destination or transportation of raw materials to areas of manufacture. The world’s most economically stable countries depend on deep-sea transportation to keep their economies intact. This also implies that deep-sea markets are heavily affected by prevailing economic conditions between respective markets. Sometimes the deep sea transportation service is successful in the transportation of military commodities or supplies. This is an aspect that is particularly common in countries such as the US.

The crude oil freight tanker market is made up of three major players; transporters, crude oil owners and shipping agents. The latter normally participate in the trade in order to represent either party in transactions. Revenues that shipping companies get for offering transportation services are largely determined by freight rates at any time. However, these areas are usually fixed over a certain period of time. On the other hand, freight charges largely depend upon the nature of the vessel used to transport the crude oil.

Debating on the benefits and drawbacks of the market and the mixed economies offers a deeper insight into the two systems. While the market economy uses the market forces such as supply and demand as the sole basis for the economic decisions rarely engaging the government, the mixed economy incorporates the material prosperity of capitalism along with the stability lent by the minimal government intervention (Ikeda, 1997). The biggest advantage of the market oriented economy is the determination of the unique price which is determined on the basis of market demand and supply (economywatch.com, 2010).

The decision regarding what to produce, how much to produce and for whom to produce is solely the sellers decision in a competitive market environment. The optimal allocation and distribution of the country’s resources is also based on the principle of price. According to Lee and McKenzie (1993), while the proponents of market economy see this freedom about individual objectives in corporate exchange as a harbinger for economic prosperity, there is always a fear about dispensing freedom to self policing businesses.

The biggest drawback of the market economy is the widened gap between the rich and the poor. A fall in demand of a commodity in such an economy might result in the prices becoming unaffordable for those below the poverty line. Without the due government involvement, the social costs and the public goods might get ignored and economic instability may creep in. The mixed economy considers the welfare role of the state, putting a check on the wastage of resources and values the social cost which is generally ignored in the market economy.

The mixed economy aims towards betterment of all economic sections of the society unlike the market economy which is normally aimed towards the middle or upper class of a community. The individuals can help guide the economy not only through the choices they make as consumers but also by the way of voting for the officials who shape the economic policy. The government intervention lends stability to the system while the economy reaps the material prosperity of capitalism. The ratio of capitalistic to socialistic elements in the mixed economy often decides the degree of advantages it reaps.

The taxes that are paid to the government in turn help the businesses through social programs, infrastructure and other government services. The supporters of the market economy believe that since the government relies on tax revenue, it is far less likely to feel the discipline imposed by the market forces. The ownership and bureaucratic control issues might erupt between the private and public sectors. The high tax ratio, development of state monopolies, corrupt regulatory practices are also some problems linked with the mixed economy.

The effects of globalization on the world market, as is partly described in the PBS series Commanding Heights, is largely positive for the economics of humanity. Poorer peoples from more impoverished areas of the world truly benefit financially, socially, and politically from free trade practices, as do companies who search for opportunity and labor in these more economically remote areas. However, investors do need to be aware of the lack of ethical government, infrastructure, and education in many of these regions.

Although through reaching out to other areas of the planet are people who can often work for less money or produce better outcomes, benefiting the growth of richer, more powerful companies, these companies must also know the limits of their investments in regions with rocky social and political and climates, as well as try to uphold the basic ethics of social justice in their work practices and pay strata. No doubt it can be hard to shift in the ever changing world. Companies shift, change, collapse, reform, die, and are born, and with these financial and economical waves can come tension, confusion, and social and political unrest.

However, this unrest should not be viewed mostly negatively. In order for modern companies to emerge stronger than ever, political battles must be fought, employees must be hired and fired, and new ground must be broken to shore up the modern economic world market across the planet. This modern world crosses national borders and even transcends them, linking people of all faces and races together in the journey toward finding a balanced, flexible, and working economic system. The negative side of globalization has to be considered rationally.

If there were no turmoil, life would be bland, motionless. There has to be change in order for companies to emerge vibrantly, and, importantly, with this economic vibrance very often comes positive social and political change. Workers have to be flexible in their work expectations, just as workers have to flexible in the worldwide, not just nationwide, pay strata. While the gap between financially rich and poor is often unnecessarily wide, it is also common that the wealthier peoples are often centered in wealthier regions, in wealthier nations.

All too often, the people who have had a lot for a long time don’t pause to think of how their economic, social, and political inaction in other parts of the world lends to world poverty. The economy of tomorrow isn’t about winners and losers, isn’t about rich and poor, it’s not about pitting people against one another, rather it’s about a worldwide economic system which is authentically sustainable for all human life.

Moving companies across the planet and doing business with neighbors is going to include elements of strife and upheaval, revolutions and battles, however, the end result will be a global home of people who have linked across borders, who have broken down walls, and who have figured out the motion of successful business practices and trade, of social rights and ethical politics, in the new age. With the globalization of free trade naturally comes the globalization of free people.

References PBS. (2009). Commanding Heights. The New Rules of the Game. http://www. pbs. org/wgbh/commandingheights/lo/story/index. html

Command Economic System: When we talk about the term “command” in historical context; whether it relates to economic, political or warfare, command has always been vested in the hands of the few. If we relate “these few” to a group of people who exercise power in terms of making decisions (be it economic/social/political etc) for ALL the people they govern, we call this process or system a “Government”. In a command economic system, this government basically owns and controls most of the economic resources of the country.

This “Command” economic system is also known as “socialism” or “communism” (McConnell – Economics) In any economic system decisions have to be made regarding production of goods and services, price setting, education, expenditure on infrastructure, resource allocation, resource/property ownership, resource distribution, establishment of industries and businesses, salaries for individuals etc. In a Command Economic System, all these decisions are taken by the Centre/Government.

Public in general/ individuals in general do not have any “say” in such government decisions. Practically speaking, “Absolute” command economy doesn’t exist in this world, even near perfect “command economy” of Soviet Union/Russia had private/market influences in its system. McConnell states North Korea and Cuba as near to perfect Command Economic Systems. Pakistan too took a step towards socialism/nationalization in Zulfiqar Ali Bhutto’s era in 1970s, which later had to be discontinued in wake of emerging capitalist economic forces at that time.

Market Economic System As opposed to Command Economic System, Market Economic System is characterized by near to minimal role of Government in governing and directing economic activity of the country. In other words, it is simply the opposite of a command economic system discussed above. The salient features of a market economic system includes “Private” ownership of economic resources (i. e. , land, labor, capital and entrepreneur), coordination of economic activity through markets, production and distribution decisions aken by private businesses and firms, determination of market prices and quantity through forces of demand and supply (rather than government) etc. The concept of market is fundamental in understanding the captioned subject. Market is a place where buyers and sellers of products come together and through their buying and selling behaviour, price and output for the economy is determined. The sellers seek to maximise their objectives (primarily profit) through engaging in practices that may compromise societal benefits at large (self interest).

To keep profitable, businesses innovate/invest in R&D to achieve economies of scale to minimise cost and this lust for market power often leads to competition/inter rivalry amongst firms which leads to production of goods and services at less than socially optimum level. Though practically speaking a perfect market economy can’t exist (government intervention is required in certain areas) Hong Kong, United States and Ireland (ref McConnell) are nearest examples of free market economies in today’s world, where Government’s intervention is minimal.