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Lesson #5.docx - Lesson #5: Market Transition The Market...

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Lesson #5: Market TransitionThe Market System and Economic Growth-Before we explore China’s transition into a market economy, it is informative tounderstand the appeal of a market system and why it can lead to economic progress-It is well known that free-market systems, rooted in economic freedom, private propertyrights, voluntary exchange, and competition, have led to unprecedented economicgrowth among societies who have adopted this system-History has clearly demonstrated thatno other economic system has been as successfulat boosting the standard of living and alleviating poverty-China is no exceptionoThe market reforms adopted by China in the 1970s led to substantial economicgrowth and increases in per-capita incomeoAccording to the World Bank, more than 850 million Chinese people have beenlifted out of extreme povertyIts poverty rate fell from 88 percent in 1981 to 0.7 percent in 2015 –unprecedented in human history.-A key feature of the market system is theprofit motive, along withcompetition, thatleads to anefficient allocation of scarce resourceoRECALL: that in a command system there is no profit motive, and it is fraughtwith misplaced incentives that yield substantial inefficienciesKey Aspects of a Market System:-Voluntary exchange between buyers and sellers-Legal system focuses on protecting property rights-There is limited govt intervention to influence or change the outcomes of market activity-Self-interest, competition and the profit motive provide incentives to be efficient-Consumer preferences determine allocation of resourcesoThe economic problem of what goods should be produces is usually solves byconsumers expressing their tastes and preference in their pattern of spendingMarkets and the Fundamental Questions of Economics- Markets find answers to the economic questions as if guided by an “invisible hand”-What to produce?
-How to produce?
-For whom?
oThe ability to pay is based on income which is generally determined by thesupply and demand of a person’s particular labour market skillsPotentialAdvantagesof a Market System-Efficient allocation of scarce resources:oScarce resources tend to go where the expected profit is highestoA market system ensures that only goods that consumers want, and need areproducedoSince consumers are willing to pay the highest price for goods, they want themost, firms have an incentive to only produce those exact goods in order to makea profit-Increased productivity:oThe profit motive promotes capital investment which encourages economies ofscale – which in turn yields lower prices for consumersoIn contrast to a command economy where workers are assigned jobs and wages

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Term
Fall
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Tags
Economics, The Market System

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