CHAPTER: SUPPLY AND DEMAND



CHAPTER: SUPPLY AND DEMAND

If you visit Russia or China and crave a McDonald’s hamburger in one of their major cities, chances are you’ll be able to satisfy your craving. But the economies of these countries are historically very different from the economy of the United States. One student asked how the forces of supply and demand work in economies not founded on capitalism. That’s a good question that gets to the essence of how markets allocate scarce resources.

The forces of supply and demand are at work whenever buyers and sellers interact with one another. In market-oriented economies like the United States, the government usually lets these forces allocate resources. Prices bring supply and demand into equilibrium, and they guide the decisions of producers and consumers.

In more centrally-planned economies, the government tries to supplant many of these decentralized decisions with its own. Prices may be set by fiat, instead of by the market. Decisions over what to produce, how it is produced, and who gets the output may be determined by a bureaucrat, rather than by private decision-makers in the market.

Experience suggests that such central planning does not work well. For one, it fails to harness the magic of the “invisible hand.” Since prices aren’t allowed to balance supply and demand, chronic shortages occur in some markets, and surpluses in others. The quality of goods and services falls, as workers have no incentive to put forth their best effort. Productivity is low, because resources can’t flow from the least efficient firms and industries to the most efficient ones.

That is why many countries around the world are making the transition from central planning to market economies. Even China and Russia have made significant market-oriented reforms in recent years. In Russia, most state-owned enterprises were privatized in the 1990s, and the government abandoned controls over most prices. China’s transition toward market capitalism has been more gradual, yet it has resulted in rapid growth in its standard of living.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download