Central Economics Wiki


== Basic economic questions==

Because resources are finite, and desires are infinite, no one can have as much of a good as they desire. This means that the resources are scarce. This causes the need for a way to divide resources up among individuals, or rationing systems. The three most common types of rationing systems are:

  1. Brute Force: If you are physically or technologically stronger than the other person trying to get the same good, you have the means to get that good. And so meaning you have the power to decide what you and others get. An example of this would be some fat kid eating all the food at a potluck and not letting some skinny kid eat anything, or even taking food directly from the skinny kid, just because he's bigger.
  2. First Come First Serve: If you get to the good first, then you can have the good before other people get there. (e.g. if the skinny kid had eaten all the hot dogs before the fat kid arrived)
  3. Price: You set a price on a good and people can afford it will get it. People who cannot afford it, do not get it. It can also be that someone in a sense outbids you on that good. This means that this person is wiling to spend more on it, and shows the relative value is visible from the consumer standpoint. Ex: Someone's willingness to buy everyday goods like StarBucks coffee.

Essentially, all methods of rationing can be traced back to brute force. For example: what prevents you from walking out of the store with a good you have not paid for? The law, which in its most base form is brute force. Also, it is the brute force that initiantes and monitors these rationing systems, and without that brute force, the systems woulnt be in control over the distribution of goods.

What types of goods should a country produce?

  • A developed country should produce secondary (manufactured goods) and tertiary goods (services) instead of primary goods. This is because a reliance on goods from primary goods will run out or become disadvantageous.
  • As the peoples' incomes increases, their need for primary goods will not really change, but they will demand more secondary and tertiary goods.
  • An example of a primary good would be livestock. An example of a secondary good would be a t-shirt. An example of a tertiary good would be public transportation.
  • After looking at these, it can be safely determined what goods the country is good at making. This is comparative advantage.

What is the best way for a country to produce?

  • Economic growth occurs when a country's production processes are efficient. It is best for production to be as efficient as possible meaning that at that point of production is the point where they maximize benefits and minimize costs.
  • Comparative advantage is another method to measure efficiency, producing a good that is better off for you and your competitors.

For whom should a country produce?

  • A country should produce for the benefit of the producer and the consumer. It is best for goods and services to be bought and sold at the equilibrium price and quantity for this maximizes the sum of consumer and producer surplus.
  • The producers make produce for the foreigners and the people that live the country.

All economies and market systems are set up to answer all of these questions in one way or another.

== Mixed economies==

  • Public: a central planned system. The government and public own and share resources, and the government makes the decisions towards economic goals. Government often sets the price and allocates resources to produce the things that it thinks the country should produce.
Example: In Russia, the government controlled resources and decided what would be produced, when, where, how and by whom.
  • Private: a market system. People own things privately and make personal decisions about how/what to produce/buy based on self-interest and utility. Price is set by natural fluctuations in the market and supply and demand. This helps naturally guide and direct the market. Private economies are seen as more efficient and overall just better than public economies.
Example: The United States. For the most part we own our own stuff and operate in self-interest.
  • Traditional: people produce what they do because they and their families have always produced it. This happened mostly before the industrial revolution when in each village/town there used to be a blacksmith, a baker, etc. Trade was passed on in families.

Every economy is some combination of these three types of economies. There isn't an economy that is completely public or private or traditional.

Comparing Central Planning and Free Market Economies

Central Planning

  1. Large amount of communication is needed between the commander and the workers, so it is less efficient than a free market.
  2. Quality is lower because workers have a set salary that isn't based on the quality of the product.
  3. Run by group interest.
  4. Hard to reallocate resources.
  5. Some things are fairer because the economy works as an overall group - there isn't as much inequality in centrally planned economies, everyone is just more poor

Free Market.

  1. Price naturally reflects the supply and demand that are always changing, so no communication is needed.
  2. Reallocation happens naturally.
  3. Not fair to everyone - there is a lot more inequality with a free market system.
  4. Run by self-interest.
  5. Hard to impossible to pool resources together for one common goal, which makes things like war impossible without some sort of government controls.

• Economies in Transition: When economies follow under one basic system it is generally very difficult to switch to another system. In history so far one of the hardest transitions has been from a central planned system to a market system. If the government releases it's control quickly there is room for corruption and people are able to seize power. This is what happened in Russia to some extent. Economies that are slowly giving up power, or accepting more government control over a long period of time are called economies in transition.