IB Economics

Chapter 2: Rationing Systems

More About Economics

• Macroeconomics vs Microeconomic• Positive vs normative• Modelling of economic relationships

– Ceteris paribus

Rationing Systems

• Planned Economics– USSR– North Korea– NB: PlannedPlanned does not mean Communist Communist

• Free Market Economics– USA– UK

Planned Economies• AKA;

– Centrally Planned or Command Economy• What, how etc. decisions by a central body• Resources are collectively owned• Total role for central body

– Arranges production– Sets wages– Sets prices– Decisions made by the central body on behalf of the

citizens (in theory for their best interest/welfare)

Planned Economies Cont.

• Immense number of decisions to be made• Central body has a huge task• Almost impossible to develop acurate forecasts

– What would happen if prices were wrongly set to low?• History:

– 1980: almost 1/3 of World population lived in planned economies

– 2010: Very few countries rely solely on planning, even in China planning has given way to the market in many areas e.g. textiles industry

Free Market Economies• AKA;

– Private enterprise economy or capitalism• Prices are used to ration goods and services• Production carried out by private firms• The market is left to set wages and prices• Should be few situations of surplus or shortage• Producers are motivated by potential profit • Resources attracted to the most profitable production• Workers are motivated to work hard due to link between

effort and reward• Signals lead to changes in the allocation of resources• The market system is seen to be self-righting

Adam Smith’s View

“Every individual… generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own gain, and he is in this… led by an invisible hand to promote an end which was no part in his intention”

Queuing for Food

Disadvantages of Market

• The existence of DEMERIT goods• Lack of MERIT goods• Exploitation of resources• Inequality• Dominance by firms

Disadvantages of Planned

• Too complicated to plan, leads to loss of efficiency and a misallocation of resources

• Poor use of resources due to lack of price mechanism

• Distorted incentives, why work hard when you will receive none of the benefit?

• Government corruption / unpopular decisions

• Planned often linked with communism

Transitional Economies

• Late 1980s• Hungary, Poland, Russia etc.• Move toward a more market orientated

system