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James use an economic system in the
1980s and 1990s a number of economies
including the UK and New Zealand moved
from being largely mixed economies to
being mainly market economies the role
of the government was reduced by
removing a number of government
regulations selling off many state-owned
entities and parts of state-owned
entities a process called privatization
there was an even more dramatic change
in the economies of Eastern Europe
including Poland and Russia in the 1990s
they move from being planned economies
to market economies these economies have
experienced a significant increase in
consumer choice and a rise in the
quality of products produced they have
also however seen a rise in income
inequality and poverty recent years have
witnessed an increasing role of market
forces in a number of economies in Asia
including China also in Africa including
South Africa in contrast there has been
a rise in government intervention in a
number of Latin American economies
including birla via and Venezuela
activity 3 India has a long tradition of
government planning but the degree of
government intervention in the economy
has been reduced in the last two decades
privatization started in 1991 with the
creation and sale of a small number of
shares in some state-owned entities this
process sped up in the first decade of
the 2000s in 2004 for instance the
Indian government sold off some of its
shares in the oil and national gas and
shares in the airports of Delhi and
Mumbai hoping that this would stimulate
more investment and greater efficiency
this privatization has been opposed by
the communist parties of India which
argue that firms perform better in the
public sector part a what is meant by
privatization Part B explained one
reason for better performance of a firm
when
one it is in the private sector - it is
in the public sector
you
this is Ahmed and this is Billy oh they
both own a clothing business in the same
economy but they both sell different
things
Ahmed sells regular clothing Billy OH
however sells clothes but for the
government bel chooses to manufacture
clothes like police and firefighter
uniforms for the government because he
almost exclusively manufactures for the
government he does not have to pay the
twenty percent tax that Hamid has to pay
he can also keep his business open
longer because the government eases its
time regulations on businesses that
supply it the government will also give
him a loan if he runs out of supplies
merits of the market system in a market
system resources move automatically as a
result of changes in price in turn price
changes are determined by the
interaction of demand and supply as its
name suggests a market economy relies on
the market system a mixed economy relies
in part on the market system this
section explores the advantages of the
market system presented in the unit for
in greater depth reallocation of
resources the use of resources is
changing all the time in response to
changes in consumer demand and costs of
production as mentioned in economic
systems resources move towards those
products whose demand is rising and away
from those which are becoming less
popular if air travel becomes more
popular the demand for sea travel would
decrease figure 1 shows an increase in
demand for air travel and a decrease in
demand for sea travel the changes in
demand caused prices to change these
alterations in price encourage firms to
switch their resources from sea travel
to air travel market forces also ration
out products when their supple Lee falls
short of demand if for instance a
disease attacks a potato crop supply
will decrease initially this may result
in a shortage with demand exceeding
supply
as shown in Figure 2a this shortage
however will drive up price until the
market again clears with demand equaling
supply as shown in Figure 2 B the market
sorts out who will receive the products
by raising the price those who are able
to pay the higher price will be able to
consume the product the importance of
competition and incentives allocative
efficiency occurs when resources are
allocated in a way that maximizes
consumers satisfaction
this means that firms produce the
products that consumers demand in the
right quantities graphically alacrity
efficiency is depicted by supply
matching consumers demand if too few
resources are devoted to the product
resulting in a shortage this is called a
liquid even efficiency under production
if too many resources are allocated for
producing the product and there is a
surplus this is called a liquid even
efficiency of a production market forces
by changing prices should eliminate
shortages and surpluses and move markets
towards alacrity of efficiency
competition can play a key role in this
process this is because in a competitive
market a firm has both an incentive in
the form of profit and a threat of
punishment in the form of a risk of
going out of business to be allocatively
efficient if it is more responsive to
the needs of consumers as compared to
its rivals it should gain a larger
market share and earn high profits at
least for a while in contrast if it does
not produce commodities demanded by
consumers it will lose sales to rivals
and may be driven out of the market
productive efficiency again in a
competitive market a firm has both an
incentive and a threat of punishment
which should drive it towards being
productively efficient and to be
productively efficient when it produces
at the lowest possible cost per unit if
it can drive its costs down to the
lowest possible level it may capture
more sales and gain more
profit if however its costs per unit are
higher than its rivals it will lose
market share and possibly all of its
sales if a firm is productively
efficient means that it is not wasting
resources if all producers in a country
are productively efficient the economy
will be able to make full use of its
resources and hence will be producing on
its production possibility curve if all
producers in a country are productively
efficient the economy will be able to
make full use of its resources and hence
will be producing on its production
possibility curve in figure four
production point a is productively
efficient with its given price resources
and technology is making products as
possible point B is productively
inefficient as some resources are either
not being used or not being put to good
use for instance some workers may be
unemployed some workers may be lying
idle and some Factory and office space
may be empty also there may be some
worker involved in jobs to which they
are not best suited and the capabilities
of some capital goods may not be fully
exploited for instance some workers may
be unemployed some workers may be lying
idle and some Factory and office space
may be empty also there may be some
worker involved in jobs to which they
are not best suited and the capabilities
of some capital goods may not be fully
exploited dynamic efficiency dynamic
efficiency arises when resources are
used efficiently over a period of time
the profit incentive and threat of going
out of business can encourage firms in a
market system to spend money on research
and development and to innovate those
firms that introduce new methods of
production and bring out new improved
products increase their chance of
gaining high profits those that do not
seek to keep up with new ideas to
produce products and do not develop new
products
run the risk of being driven out of the
market a market system has the potential
to provide some significant benefits and
benefits which can grow over time these
include providing consumers with the
power to determine what is produced
choice low prices and high quality
products if a market system is working
well it will be automatically allocating
resources according to the consumer
demand by rewarding efficiency and
punishing inefficiency it may encourage
the manufacture of products that
consumers want in our prepared to pay
for in the right quantities and at the
lowest possible cost per unit market
forces can also promote the improvement
of methods of production and arise in
the quality of products made
you
it does this by putting competitive
pressure on entrepreneurs and workers
and by providing them with incentives to
respond to changes in market conditions
for instance if demand for books is
increasing whilst the demand for cinema
tickets is falling profit and wages will
be rising in the publishing industry
while they will be falling in the film
industry these changes will encourage
some firms to switch production and some
workers to change their jobs
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