2.HowWill the Goods Be Produced?A firm might have several different methods for producing its goodsand services.Example: A music producer can make a song sound good by. Hiring a great singer, and using standard production techniques; or: Hiring a mediocre singer, and using Auto-Tune to correct theinaccuracies.Example: As the cost of manufacturing labor changes, a firm mightrespond by. Changing its production technique to one that employs moremachines and fewerworkers; orevenMovingitsfactorytoalocationwithcheaperlabor@2015PearsonEducation,Inc.11
© 2015 Pearson Education, Inc. 11 2. How Will the Goods Be Produced? A firm might have several different methods for producing its goods and services. Example: A music producer can make a song sound good by • Hiring a great singer, and using standard production techniques; or • Hiring a mediocre singer, and using Auto-Tune to correct the inaccuracies. Example: As the cost of manufacturing labor changes, a firm might respond by • Changing its production technique to one that employs more machines and fewer workers; or even • Moving its factory to a location with cheaper labor
3.Who WillReceive the Goods and Services?The way we are most familiar with in the United States is that peoplewithhigherincomes obtainmoregoodsand services.Changes in tax and welfare policies change the distribution ofincome; though people often disagree about the extent to which this“redistribution"isdesirable.@2015PearsonEducation,Inc.12
© 2015 Pearson Education, Inc. 12 3. Who Will Receive the Goods and Services? The way we are most familiar with in the United States is that people with higher incomes obtain more goods and services. Changes in tax and welfare policies change the distribution of income; though people often disagree about the extent to which this “redistribution” is desirable
Typesof EconomiesCentrally planned economies result when governments decidewhat to produce, how to produce it, and who received the goods andservices.Market economies result when the decisions of households andfirms determine what is produced, how it is produced, and whoreceivesthegoods andservices.Market: A group of buyers and sellers of a good or service and theinstitution or arrangement by which they come together to tradeMixed economies have features of both of the above.Most economicdecisions result from the interaction of buyers and sellers, butgovernments play a significant role in the allocation of resources.132015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 13 Types of Economies Centrally planned economies result when governments decide what to produce, how to produce it, and who received the goods and services. Market economies result when the decisions of households and firms determine what is produced, how it is produced, and who receives the goods and services. Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade Mixed economies have features of both of the above. Most economic decisions result from the interaction of buyers and sellers, but governments play a significant role in the allocation of resources
Efficiencyof EconomiesMarket economies tend to be more efficient than centrally-plannedeconomies.Market economies promote:Productive efficiency, where goods or services are produced at thelowestpossiblecost,andAllocative efficiency,where production is consistent with consumerpreferences: the marginal benefit of production is equal to its marginalcostThese efficiencies come about because all transactions result fromvoluntary exchange:transactions that make both the buyer andsellerbetter off.@2015PearsonEducation,Inc.14
© 2015 Pearson Education, Inc. 14 Efficiency of Economies Market economies tend to be more efficient than centrally-planned economies. Market economies promote: Productive efficiency, where goods or services are produced at the lowest possible cost; and Allocative efficiency, where production is consistent with consumer preferences: the marginal benefit of production is equal to its marginal cost These efficiencies come about because all transactions result from voluntary exchange: transactions that make both the buyer and seller better off
CaveatsAboutMarket EconomiesMarkets may not resultinfully efficient outcomes.For example: People might not immediately do things in the most efficient way: Governments might interfere with market outcomesMarket outcomes might ignore the desires of people who are notinvolved intransactions-ex:pollutionEconomically efficient outcomes may not be the mostdesirableMarketsresultinhighinequality,somepeopleprefermoreequity,i.efairerdistributionofeconomicbenefits@2015PearsonEducation,Inc.15
© 2015 Pearson Education, Inc. 15 Caveats About Market Economies Markets may not result in fully efficient outcomes. For example: • People might not immediately do things in the most efficient way • Governments might interfere with market outcomes • Market outcomes might ignore the desires of people who are not involved in transactions – ex: pollution Economically efficient outcomes may not be the most desirable. Markets result in high inequality; some people prefer more equity, i.e. fairer distribution of economic benefits