Element Ducer
Main economic laws and Mixed economies by Laura Sandberg
Mixed economies
Command and market economies both have signi¬ficant faults. Partly because of this, an intermediate system has developed, known as mixed economies.
A mixed economy contains elements of both mar¬ket and planned economies. At one extreme we have a command economy, which does not allow individu¬als to make economic decisions, at the other extreme we have a free market, where individuals exercise considerable economic freedom of choice without any government restrictions. Between these two extremes lies a mixed economy. In mixed economies some resour¬ces are controlled by the government whilst others are used in response to the demands of consumers.
Technically, all the economies of the world are mixed. Some countries are nearer to command econo¬mies, while others are closer to free market econo¬mies.
The aim of mixed economies is to avoid the disad¬vantages of both systems while enjoying the bene¬fits that they both offer. So, in a mixed economy the government and the private sector interact in sol¬ving economic problems. The state controls the share of the output through taxation and transfer payments and intervenes to supply essential items such as health, education and defence, while private firms produce cars, furniture, electrical items and similar, less essential products.
The UK is a country with mixed economy. Some services are provided by the state whilst a range of privately owned businesses offer other goods and services.
Prices In A Market Economy
Prices perform two important economic functions: They ration scarce resources, and they motivate pro¬duction. As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe this as the rationing effect of prices. In a market system goods and services are allocated, or distributed, based on their price.
Price increases and decreases also send messages to suppliers and potential suppliers of goods and servic¬es. As prices rise, the increase serves to attract addi¬tional producers. Similarly, price decreases drive pro¬ducers out of the market. In this way prices encour¬age producers to increase or decrease their level of output. Economists refer to this as the production- motivating function of prices. But what causes pric¬es to rise and fall in a market economy? The answer is Demand!
The Law of Demand
Demand is a consumer’s willingness and ability to buy a product or service at a particular time and place.
The law of demand describes the relationship be¬tween prices and the quantity of goods and services that would be purchased at each price. It says that all else being equal, more items will be sold at a lower price than at a higher price.
Demand behaves the way it does for some of the following reasons:
More people can afford to buy an item at a lower price than at a higher price.
Let’s see the law of demand from the point of ice¬cream selling:
At a lower price some people will substitute ice¬cream for other items, thereby increasing the demand.
At a higher price some people will substitute other items for ice-cream.
How many ice-creams can a man eat? One, two, more? Some people will eat more than one if the price is low enough. Sooner or later, however, we reach the point where enjoyment decreases with every bite no matter how low is the cost. What is true of ice-cream applies to most everything. After a certain point is reached, the satisfaction from a good or service will begin to diminish. Economists describe this effect as diminishing marginal utility. « Utility « refers to the usefulness of something. Thus «diminishing marginal utility « is the economist’s way of describing the point reached when the last item consumed will be less sat¬isfying than the one before.
Diminishing marginal utility helps to explain why lower prices are needed to increase the quantity de¬manded. Since your desire for a second ice-cream is less than it was for the first, you are not likely to buy more than one, except at a lower price. At,even lower prices you might be willing to buy additional ice-creams and give them away.
Elasticity Of Demand
The shape and slope of demand curves for different products are often quite different. If, for example, the price of a quart of milk were to triple, from $.80 to $2.40 a quart, people would buy less milk. Similarly, if the price of all cola drinks were to jump from $1 to $3 a quart (an identical percent increase), people would buy less cola. But even though both prices changed by the same percentage, the decrease in milk sales would probably be far less than the decrease in cola sales. This is because people can do without cola more easily than they can do without milk. The quantity of milk purchased is less sensitive to changes in price than is the quantity of cola. Economists would explain this by saying that the demand for cola is more elastic than the demand for milk. Elasticity describes how much a change in price affects the quantity demanded.
How Elasticity is Measured
When the demand for an item is inelastic, a change in price will have a relatively small effect on the quan¬tity demanded. When the demand for an item is elas¬tic, a small change in price will have a relatively large effect on the quantity demanded.
Elasticity can also be measured by the «revenue test.» Total revenue is equal to the price multiplied by the number of units sold.
If, following a price increase, total revenue falls, the demand would be described as elastic. If total rev¬enue were to increase following a price increase, the demand would be be inelastic. Similarly, if total reve¬nue increased following a price decrease, demand would be elastic. If the price decrease led to a decrease in total revenue, the demand for the item would be de¬scribed as inelastic.
Changes in Demand
Until now, we have been describing the relation¬ship between an item’s price and the quantity of an item people will purchase. Sometimes things happen that change the demand for an item at each and every price. When this occurs, we have an increase or a decrease in demand.
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Mixed economy
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