AS-Level Economics Video 3 - Market and Planned Economies

Summary

This video explores different economic systems, focusing on the free market and command economies. It discusses how resources are allocated in each system and their respective advantages and disadvantages. A free market system encourages innovation but can lead to inequality, while a command economy provides stability but lacks incentives for progress. Most countries operate under mixed economies, balancing market mechanisms with state intervention. The video concludes by questioning the ideal balance between private and state control.

Takeaways

• 🌐 Most countries have a mixed economy, where both market mechanisms and state planning allocate resources.
• 💼 A free market system is characterized by private ownership and allocation of resources by market forces, but this system does not exist in its pure form.
• 🚀 In a free market, profit incentives drive dynamic efficiency, leading to innovation and progress.
• 📉 A free market can result in high-quality goods at lower prices due to competition among private firms.
• 📈 Consumers have more choice in a free market system as they can select from a range of similar products.
• 💔 Free market systems can lead to intolerable levels of inequality and lack of social safety nets for the vulnerable.
• 🏥 Essential services like education and healthcare may be unavailable to the poor in a purely free market system.
• 🏢 Monopolies can exploit the public in a free market by dominating industries and eliminating competition.
• 📉 A command economy, where the state controls all resource allocation, can lead to low or no unemployment as the government assigns jobs.
• 🔄 There is little incentive to improve in a command economy, leading to stagnation in product quality and innovation.
• 📊 Mixed economies combine elements of both free markets and state control, with the balance being a subject of ongoing debate.

Q & A

What is the main topic of the third video in the AS level Economics series?

The main topic of the third video is types of economic systems.

What is a mixed economy?

A mixed economy is an economic system where both the market mechanism and the state allocate resources, with private and public ownership coexisting.

What are the advantages of a free market system?

Advantages of a free market system include profit incentives leading to dynamic efficiency, high-quality goods at lower prices due to competition, more choice for consumers, and lower taxes.

What are the disadvantages of a free market system as discussed in the video?

Disadvantages of a free market system include intolerable levels of inequality, unemployment during economic downturns, unavailability of essential services like education and healthcare for the poor, and the potential for monopolies to exploit the public.

What is a command economy?

A command economy is an economic system where the state has complete control over the allocation of all resources, and everything is planned by the ruling party without market mechanisms.

What are the potential issues with a command economy?

Potential issues with a command economy include a lack of incentive to work hard, no choice for consumers, no progress or innovation, and the state's inability to accurately allocate resources leading to shortages and overproduction.

Why did the command economy system fail according to the video?

The command economy system failed because it could not adapt to the needs and preferences of the people, lacked innovation, and was not efficient in resource allocation.

How does the video describe the current economic situation in China?

The video describes China as having a mixed economy with private ownership of businesses, unlike the command economy of the past, and is not a purely communist state.

What is the debate at the heart of economic policy according to the video?

The debate at the heart of economic policy is finding the right balance between private and state ownership and allocation of resources within a mixed economy.

What will be the focus of the next video in the series?

The next video will focus on the market mechanism and how the allocation of resources takes place in micro markets, starting with the demand curve.

What is dynamic efficiency as mentioned in the video?

Dynamic efficiency refers to the continuous improvement and progress in an economy over time, driven by innovation and competition.

Outlines

00:00

🌐 Free Market System Overview

This paragraph introduces the concept of economic systems and specifically focuses on the free market system. It explains that a completely free market system would allocate all resources to private businesses through market mechanisms. The paragraph outlines the advantages and disadvantages of such a system. Advantages include profit incentives leading to dynamic efficiency, high-quality goods at lower prices due to competition, and lower taxes. Disadvantages include high inequality, unemployment during economic downturns, lack of essential services for the poor, and the potential for monopolies to exploit the public.

05:01

🏭 Command Economy Characteristics

The second paragraph discusses the command or planned economy, where the government has complete control over resource allocation. It highlights the potential benefits such as low unemployment, reduced waste, and no need for marketing. However, it also points out the drawbacks, including lack of incentive to work hard, limited consumer choice, and a lack of progress and innovation. The narrative includes a story about Alan Greenspan's observations in the Soviet Union, illustrating the stagnation in quality and innovation under a command economy.

10:01

🔄 Mixed Economy Balance

The final paragraph discusses the mixed economy, which is a combination of private and state ownership of resources. It mentions that most countries, including China and the USA, have mixed economies but with different balances between private and state control. The paragraph questions the right balance between the two and suggests that this is a central debate among economists and politicians. It concludes by hinting at the next video's focus on the market mechanism and its role in micro markets.

Keywords

💡Economic Systems

Economic systems refer to the various ways in which a society organizes its economic activities and allocates its resources. The video discusses different types of economic systems, such as free market, command, and mixed economies. Understanding these systems is crucial as they dictate how resources are distributed and how economic decisions are made within a society.

💡Mixed Economy

A mixed economy is an economic system that combines elements of both free market capitalism and centralized economic planning. It is characterized by the coexistence of private and state ownership of resources. The video explains that most countries have a mixed economy, where the market mechanism allocates some resources, and the state plans for others, as in education and healthcare.

💡Free Market System

A free market system is an economic setup where all resources are allocated by the market mechanism, driven by supply and demand without government intervention. The video mentions that a completely free market system would lead to private businesses owned by individuals, with profit incentives driving innovation and efficiency.

💡Command Economy

A command economy, also known as a planned economy, is an economic system where the government has control over the allocation of resources and the production of goods and services. The video describes how in a command economy, the ruling party dictates what will be produced and how resources are used, as opposed to market forces.

💡Dynamic Efficiency

Dynamic efficiency refers to the ability of an economy to progress and innovate over time. The video explains that a free market system would likely exhibit dynamic efficiency due to competition and profit incentives, which drive firms to develop new products and improve existing ones.

💡Inequality

Inequality is the unequal distribution of resources, income, or wealth among individuals or social groups. The video discusses how a free market system could lead to intolerable levels of inequality, as there would be no social safety net for the most vulnerable, leading to greater gaps between the rich and the poor.

💡Business Cycle

The business cycle refers to the periodic fluctuations in economic activity characterized by periods of economic expansion (booms) and contraction (downturns). The video mentions that in a free market system, the business cycle's effects would be more extreme, leading to greater unemployment during downturns and more significant booms during upturns.

💡Essential Services

Essential services are those that are crucial for the well-being of a society, such as education and healthcare. The video points out that in a purely free market system, these services might not be accessible to the poor, as they would be provided by private companies and would require payment.

💡Monopolies

A monopoly is a market situation in which one company controls the entire supply of a particular product or service. The video discusses how monopolies could exploit the public in a free market system by creating barriers to entry and forcing consumers to buy low-quality goods at high prices.

💡Market Mechanism

The market mechanism is the process by which supply and demand interact to determine prices and allocate resources in a free market. The video highlights that most of the AS level economics course focuses on how the market mechanism works and how it can be overridden by government intervention.

💡Government Intervention

Government intervention refers to the actions taken by the state to influence economic activities and outcomes. The video discusses how governments sometimes intervene to override the market mechanism, particularly in providing essential services and regulating monopolies.

Highlights

Introduction to types of economic systems

Explaining the concept of a mixed economy

Definition and characteristics of a free market system

Advantages of a free market system: profit incentive and dynamic efficiency

Advantages of a free market system: high quality goods and lower prices

Advantages of a free market system: consumer choice and low taxes

Disadvantages of a free market system: intolerable levels of inequality

Disadvantages of a free market system: unemployment and extreme business cycles

Disadvantages of a free market system: essential services may be unavailable to the poor

Disadvantages of a free market system: potential for monopolies to exploit the public

Introduction to a command or planned economy

Characteristics of a command or planned economy

Advantages of a command economy: low or no unemployment

Advantages of a command economy: less waste of resources and no marketing

Disadvantages of a command economy: lack of incentive to work hard

Disadvantages of a command economy: no choice for consumers and no progress

Disadvantages of a command economy: mismatch between what the state produces and what people want

The fall of command economies and the rise of mixed economies

Definition and characteristics of a mixed economy

Examples of mixed economies: China and the USA

Debate on the balance between private and state control in mixed economies

Preview of the next video on the market mechanism and micro markets

Transcripts

hello welcome to the third video of this

as level uh series of Economics videos

um and video 3 is about types of

economic systems because uh it is

possible uh that the resources the

limited resources in the economy are not

allocated by the market mechanism most

of the as level economics course is in

is about looking at how the market

mechanism demand and Supply decides how

we use our the limited resources that we

have uh to solve the basic economic

problem and also uh how government

sometimes intervenes to override the

market mechanism but we should remember

that it's possible for National

economies to be uh set up in different

ways and having different uh

methods for allocating those limited

resources now most countries in the

world have what's called a mixed economy

uh it that means that there are some

resources allocated by market mechanism

and other resources allocated by the

state through planning um but there is

possible it is possible to have extremes

uh and and that's what I want to look at

here so as we look at types of economic

systems the first type of economic

system we're going to look at is the

free market system the free market

system a completely free market system

would be where every single

resource available would be allocated by

the market mechanism to private

businesses owned by private individuals

and this uh this system which doesn't

actually exist in the world uh there are

no there's no country which does not

have a state uh system of allocation of

resources as well as private own ship

but were it to be true that a country

had merely private ownership um this

would throw up certain advantages but

certain disadvantages as well and

they're listed here so there are nice

features and nasty features of of such a

system the nice features profit

incentive so there would be dynamic

efficiency but if everything is owned

privately then everything is driven by

The Profit incentive and it would be in

the interests of firms to come up with

new products and develop and research

the new product prod s which people

would want to buy from them and not

their competitors and in this way we get

Dynamic

efficiency Dynamic efficiency which uh

is when the economy is set up in such a

way that we get the most progress over

time so Dynamic

efficiency would exist under a free

market system and we'd likely see lots

of innovation and progress secondly some

people say that in such a system there

would be high quality goods and lower

prices because private firms are

competing with each other to win Custom

so they have an incentive to drive the

price as low as possible and make the

quality of the good as as high as

possible in order to win Custom and be

successful in competition and consumers

would have more Choice as they have a

range of uh similar products from uh

from different companies and different

businesses to buy to buy from um and

finally there would be low tax uh

because after if the state is not having

to provide uh Services then it doesn't

need to collect tax because it doesn't

have to pay out to to public sector

workers and the provision of public

sector services so consumers who are

workers would and businesses would also

enjoy lower tax and that leaves uh more

disposable income for consumers uh as

workers as well to uh go out and spend

who could raise living standards and it

leaves businesses with more money to

spend on investment

research however there will be

intolerable levels of inequality because

there' be no uh provision for or social

safety net for those who are most

vulnerable in society those with the

lowest skills or the no skilled and the

inequality would be even greater uh

during the business cycle during

downturns we would see more unemployment

and during the upturns we see in booms

uh there'd be greater booms as and so

the the distance between the the output

gaps of the the boom and the downturn

the the trough in the business cycle

would be more extreme and those uh and

there will be greater suffering

therefore for those caught uh the wrong

part of that business

cycle essential Services specifically

education and Health Care would be

unavailable to the poor because it would

be a it would be a good that has to be

paid for and there would be those who

could not afford to pay for uh private

education and private healthcare and

there would be those who would choose

not to pay for private education so as

we have it in our in Britain and in in

all Western countries the law says

children must go to school and it's

provided free and uh that's uh that's

the intervention of the state who

recognize that were it left were it to

be left of the free market system it

would be

unacceptably uh it would be unacceptable

because only those who could afford

would be able to access those essential

services for a civilization and finally

monopolies um would exploit the public

it's very possible that giant private

companies would come to dominate

Industries um creating barriers to entry

where other firms could not challenge

them and compete with them and in the

end consumers wouldn't get choice and

would be forced to buy from monopolies

perhaps low quality Goods at high prices

so there are features of this uh free

market system which um are so

undesirable that that governments of any

political persuasion have said no we

can't accept that there must be some

State

involvement but how far should the state

involvement go of course the ultimate is

Communist States where the the ruling

Communist Party have had complete and

utter control over the allocation of all

resources nothing is decided by the the

market mechanism everything is planned

as the party commands what will be

produced and how resources limited

resources should be used and that is

called a command economy and let's look

at some of the features of a command or

planned

economy so a command or planned economy

would have certain desirable features

there would be low or no unemployment

because the government would allocate

each unit of labor each worker into a

specific job there will be less waste of

resources presumably and and no waste on

marketing because there'd be no need for

private firms to to use marketing to try

and convince consumers to buy their

goods the government would be providing

the goods so there might be a better use

of resources in that sense however there

would be no incentive to work hard and

the quality of work would certainly

suffer because under the price mechanism

if a company is not producing the good

which people want or is not producing it

at a competitive level they will go out

of business that's not going to happen

and workers will know that and so the

quality of work will very likely Fall

there'll be no choice for consumers they

have to buy the the product that is

allocated to them by the government

supplier um and there might be no

progress as well and that reminds me of

a very nice story which Alan Greenspan

the

uh Federal Reserve uh chairman uh told

he was on a trip while working for the

Federal Reserve Bank uh of America he

was on a trip to uh the USSR as it was

then the Soviet uh uh Republic and as he

was being driven from the airport uh to

the to the city um he was passed some

agricultural fields and he saw some

tractors working in in a field and these

tractor struct is extremely old and he

asked about the tractors and the reply

he got was that well these are the

tractors that the Soviet Union has been

making for many many years and they're

perfectly okay and the government

tractor Factory that makes these works

very well and produced these tractors

for for a long long time but of course

what Greenspan realized was that in the

US where he had come from competing

tractor companies

had fought against each other to come up

with better and better tractors to be

the tractor that uh Farmers wanted to

buy and in that way the quality of

tractors in the US had uh progressed

this is dynamic efficiency there was

nothing wrong with the original tractors

but the quality of tractors and the

innovation in tractor

manufacturing uh had had had progressed

leaving behind uh what what the Soviets

were still making the concept was let's

improve the quality of tractors so

people buy our tractors that was the

attitude of private tractor companies in

the US whereas the attitude in the

Soviet Union was well we' allocated uh

resources into a tractor Factory they

make tractors that work that's fine we

can leave that there was no pressure to

improve the quality of the tractors and

this is what uh struck Greenspan as he

was uh in his first few minutes in in in

the Soviet Union um and uh and I think

that that that is a major problem with

the command economy there is no progress

if there doesn't need to be

progress and finally perhaps what the

what the state decides should be made is

is not what people want what gets

produced is not what people want it's

the government deciding what will be

produced and in what quantities but

inevitably there are both shortages as

the government does not allocate enough

resources into a particular product uh

and there are gluts or there's over

production of some Goods as well as the

government over allocates resources how

can the government planning committee

know precisely what quantities of every

single good to produce uh inevitably

they get those quantities wrong now the

command or planned economy does not

exist uh anymore uh there were around 30

countries who attempted to run command

or planned economies but when communism

collapsed in the late 1980s early

199s um it was Illustrated that this was

not a system that worked of course North

Korea is still a communist country and

still attempts to do this it would be

wrong though to say China is this

because there is private ownership of of

businesses in China so although China is

still ruled by the Chinese Communist

party they have allowed it to become a

mixed economy like nearly all of the

economies in the world so a mixed

economy is where private and state

ownership of resources

coexists where Market mechanism where

the market mechanism loates some

resources and yet plan Decisions by

government determine output and price in

other Industries so it's a combination

of the market mechanism at work in some

markets and the state overriding that

market mechanism in other markets

typically Education Health Care

defense but what is the right balance

because China and the USA are both

examples of mixed economies so not all

mixed economies are the to the same

extent extent the balance between

private and uh and State control of

course there's huge differences and

that's there in lies the debate that is

at the heart of um many economists uh

and politicians uh no one really argues

strongly for any other system but a

mixed economy but where should the

balance be between private and state

ownership of and and and allocation of

resources that's the issue um

that that is

debated okay so from here we move on and

look at specifically the market

mechanism and how in first of all micro

individual markets micro markets um how

the allocation of resources takes place

and so in the next video video four we

look at the demand curve so I'll see you

in that

video