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Economics Question - Essay Example

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What is the central “coordinating mechanism” determining 1.) what is produced; 2.) how it is produced; and 3. who gets how much from the productive activity in an: a. market economy and in a b.) planned economy?
A central coordinating mechanism could take many different…
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Chapter 3: Why Free Markets Need s Questions for Thought and Review Corresponds with Questions 2 on page 73 of 7th edition What is the central “coordinating mechanism” determining 1.) what is produced; 2.) how it is produced; and 3. who gets how much from the productive activity in an: a. market economy and in a b.) planned economy?
A central coordinating mechanism could take many different forms. It could for example be a committee of bureaucrats deciding how many shoes to produce in a given year. This is a very inefficient method of economic planning because it is inflexible and because no group of humans can possible deal with all the information a market gets. It would be a very inefficient mode of distributing resources.
Corresponds with Questions 3-4 on page 73 of 7th edition.
2. How do predominantly market economies solve the three problems of what gets produced; how it gets produced and for how, and for whom to produce.
Answer the same for centrally planned socialist economies.
A market system lets the market decide what is produced. A lot of different price points—effectively the invisible hand—decide where resources go and what prices should be. Production is decided by supply and demand. In a socialist economy the government or a committee decides they would like more butter or more shoes produced in the current year and choose a quantity for production that they believe will be sufficient (it rarely is—or it is far too much).
3. A market system is often said to be based on consumer sovereignty—the consumer really determines what is to be produced.
Describe the theoretical mechanism in which consumers are sovereign, who consumers really decide what goods they want and how they demonstrate those decisions and desires. Is there a contradiction between the statement that businesses decide what is produced and the idea that consumers have sovereignty?
Consumers are sovereign in so far as in a market economy their demand decides what products are produced. Businesses decide what to produce based on their reading of consumer demand. Businesses fail when they have not properly estimated the demand for their product. Consumers are sovereign.
Under the market system who determines desires?
Consumers and businesses determine desire. Businesses can generate desire via advertising, novelty, and innovation.
Are some consumers are more “sovereign” than others?
Savvy consumers could be said to be more sovereign. Consumers who refuse to succumb to advertising or externally generated desire.
Corresponds with Question 11 of 7th edition and question 5 of Questions from alternative perspectives:
11. You are starting a design company in which you plan to sell designs to producers. What form of business would you chose?
I would definitely choose a market driven business.
12. What are the two largest categories of federal expenditures?
Healthcare and debt servicing.
15. What are the six roles of government in a market economy? Give examples.
National defence – this is too important to outsource to the market; Some health care such as Medicare and Medicade. Maintaining national parks. Taking taxes. The Federal reserve system that centrally plans monetary policy. Stimulus spending in times of recession. Read More
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