January 11 notes - Tentative Quiz Dates Monday February 6th...

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January 11, 2006 Tentative Quiz Dates: Monday February 6 th Monday April 3 rd Homework Dates: February 22 nd April 19 th TA: Friday 10am: Eleonora Centrally Planned Economies versus Market Economies Centrally Planned Economy : an economy in which the government decides how economic resources will be allocated. Market Economy : an economy in which the decisions of households and firms interacting in markets allocate economic resources. Centrally Planned Economy From 1917-1991, the main centrally planned economy was the Soviet Union. Here, the government decided what goods to produce, how to produce them, and who would receive them. Managers of factories were required to follow government orders rather than satisfy consumers. They are not successful in producing low-cost, high-quality goods and the standard of living is quite low. This causes increasing dissatisfaction and now only Cuba and North Korea have centrally planned economies. Market Economies Rely primarily on privately owned firms to produce goods and services and to decide how to produce them. Markets rather than the government determine who receives the goods and services produced. Firms must produce the goods and services that meet the wants of consumers. So ultimately, the consumers decide. Because firms offer the highest-quality good for the lowest price, there is pressure to use the lowest-cost method of production (hence outsourcing). The Modern “Mixed” Economy Economists argue that the extent of government intervention makes it no longer accurate to refer to the U.S., Canadian, Japanese, and Western European economies as market economies. They should be mixed economies. Mixed Economy : an economy in which most economic decisions result from the interaction of buyers and sellers in markets, but where the government plays a significant role in the allocation of resources. Efficiency and Equity Market economies tend to be more efficient than centrally planned economies. Two types: o Productive Efficiency : occurs when a good or service is produced at the lowest possible price.
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o Allocative Efficiency : a state of the economy in which every good or service is
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