Issues for Canadians

CHAPTER 6

Mixed, Market and Planned Economies

SEVEN PRINCIPLES OF THE MARKET ECONOMY

  1. SUPPLY AND DEMAND
  2. When the consumers demands are met and they are supplied. If demand is high, someone will go out and start producing it because they know they can make a profit.
  1. PROFIT
  2. Everyone wants to make money. Profit is the engine that drives a market economy.
  1. COMPETITION
  2. Provides lower prices, quality and variety.
  1. BOOM AND BUST CYCLE
  2. When the economy moves up and down. Products are in demand and a profit is being made at one point and then all of a sudden, profits decrease and products no longer are selling because somebody is producing a better and new product.
  3. Prosperity – recession- depression- recovery
  4. During the depression of the 1930’s many people lost everything.
  1. EQUILIBRIUM
  2. Products are in demand and the producer is able to make a profit
  3. Consumers are willing to pay asking price
  1. GOVERNMENT
  2. Stays out of marketplace
  1. CONSUMER
  2. Determines what products and goods will be produced
  3. Consumer controls the market economy

ADVANTAGES OF A MARKET ECONOMY

  • Supply is plentiful because more people are competing for their products to be sold. New products are always being invented.
  • Quality constantly improves.
  • The government is not involved therefore there are few or no taxes and the supplies are more available to the factories (few hidden costs).
  • The price of goods will be cheaper because of competition and no government involvement.
  • Variety of goods, many choices.
  • Freedom for producer, can invent anything they want. No restrictions on imagination.
  • There are more jobs available as more people are being hired to produce more products.
  • The demand of goods is met.
  • Larger number of industries.
  • Most efficient economic system.

DISADVANTAGES OF A MARKET ECONOMY

  • The government is not involved therefore making products unsafe as they are not government checked.
  • Unstable economy – Boom and Bust – economy moves up and down and is always unstable and unpredictable.
  • Unemployment
  • Prices are unstable – move up and down depending on the economy.
  • Bankruptcy – many businesses fold
  • No Social Programs – unemployment insurance, health care, pensions, etc.
  • No security for workers – as the economy moves up and down. People are fired, mainly during the recession but also during the depression.
  • No security for small business.
  • Monopoly – one company controls the market for a period of time.

PLANNED ECONOMY

  • U.S.S.R. used this theory of economics from 1917-1991.
  • Based on the ideas written by Karl Marx
  • Called so because someone is in command/control/authority issues the commands about
  • Three economic questions:
  • What should be produced?
  • How should it be produced?
  • Who should receive it after it is produced?
  • Two conditions must exist if a command economy is to work:
  • those making commands (government) about production must have the political power to make them.
  • the government must either own or control the means of production, to make sure it can produce what it thinks is best.
  • Karl Marx is remembered as the person who organized the ideas about the command economy.
  • Marx is best known for criticizing the market economic system because he felt it separated people into two classes:
  1. workers – worked for owners
  2. owners – owned factories and machines needed to make goods
  • Marx believed that the whole society would make the decision about what to produce, how to best produce it, and who it should be produced for.
  • Today’s command economies are different from the one Marx described. Marx believed all of society would make economic decisions. Command economies would rely on government to make decisions for the people.

EIGHT PRINCIPLES OF A PLANNED ECONOMY

  1. Government controls all means of production, distribution and services.
  2. Government determines all wages.
  3. Wages are equated with the needs of the people.
  4. Government decides what products will be available.
  5. Wages and prices are regulated.
  6. Very stable economy – no booms no busts because the government controls everything.
  7. Small group decides for everyone. The government decides everything for the entire country.
  8. Equality – resources for the nation are equally distributed among the people.

ADVANTAGES OF A PLANNED ECONOMY

  1. Very Stable – long range recessions, etc. are absent. No bankruptcy.
  2. Equality
  3. Cradle to Grave – protection of population. From the time you are born until you die, the government provides and takes care of you.
  4. No Poverty – people all have jobs and everyone is taken care of.
  5. Full Employment.
  6. Products are Tested and Safe.
  7. Prices are always the same.
  8. Large Expenditures – or projects possible because decisions are made for everyone.
DISADVANTAGES OF A PLANNED ECONOMY
  1. Government may not be in-touch with what the people actually want and need.
  2. Goods people do want may be under produced and things that people don’t want may be produced.
  3. Marx originally believed society would make the economic decisions – this did not work out as planned.
MIXED ECONOMY

A Mixed Economy uses ideas from market economies and some from Command Economies. For example, in Canada consumers can choose to buy or not to buy a product. But the Canadian government also makes some command choices for its citizens. Usually these choices are based on needs that all Canadians have, such as health care, communications, transportation, etc.

  • Kensian Theory – John Maynard Keynes
  • Government (taxes and monetary policy) and consumers control it.

PRINCIPLES OF A MIXED ECONOMY

  1. Demand and Supply – government regulations change this – costs are higher
  2. Boom and Bust Cycle – in recession, the government raises taxes. Interest rates are decreased in hopes of getting people to reinvest in business. In the boom and bust cycle, people do not reach starvation because the government backs them up with social programs. One example of regulation is our banking system. Due to the Banking Act (regulation) people cannot lose their money when a bank goes bankrupt. In Canada, banks don not go easily into bankruptcy.
  3. Competition – along with competition comes equilibrium. With competition comes lower prices, quality and variety. Profit is still the engine that drives the economy.
  4. The Government and Consumer decide what will be produced. The government passes regulations and enforcement. These have to be paid for, therefore the prices go up. The consumers pay these prices.
  5. Initiative – rewards for hard work, brains, talent, innovation.

ADVANTAGES OF A MIXED ECONOMY

  1. Larger variety of products.
  2. Better quality – government regulations do this.
  3. Lower Prices – than in command economy because of competition.
  4. Innovation – people are always striving for better ideas because they get more money. Competition also does this.
  5. Incentives – people work harder.
  6. Safety Net for employees – security (social programs) recession and depression are not harsh.
  7. Less Bankruptcies – and suffering because of the laws and regulations of the government. The government backs up and steps in when a business is in need.
  8. More Stable Economy – boom and bust not as severe.

DISADVANTAGES OF A MIXED ECONOMY

  1. Deficit and Debt by government – has to pay for social programs, etc.
  2. High Taxes – government needs more money for social programs
  3. Higher Prices – regulations
  4. Wages are High – because the government takes off so much money for the taxes therefore, people demand higher wages.
  5. Products Cost More because they are tested.
  6. Some Products are Not Available – to consumers due to government regulations.
  7. Higher Cost Goods – result in lower exports or greater imports.
  8. Unemployment – because of higher costs, higher wages, debt, low exports, and too many imports, etc.
  9. Inflation – prices go up and money value decreases.