Unit 5 The Role of the Market

Markets bring together buyers and sellers of goods and services. In some cases, such as a local fruit stall, buyers and sellers meet physically. In other cases, such as the stock market, business can be transacted over the telephone, almost by remote control. We need not go into details. Instead, we use a general definition of markets.

A market is a shorthand expression for the process by which households’ decisions about consumption of alternative goods, firms’ decisions about what and how to produce, and workers’ decisions about how much and for whom to work are all reconciled by adjustment of prices.

Much of economics is devoted to the study of how markets and prices enable society to solve the problems of what, how, and for whom to produce. Suppose you buy a hamburger for your lunch. What does this have to do with markets and prices? You chose the cafe because it was fast, convenient and cheap. Given your desire to eat, and your limited resources, the low hamburger price told you that this was a good way to satisfy your appetite. You probably prefer steak but that is more expensive. The price of steak is high enough to ensure that society answers the “for whom” question about lunchtime steaks in favour of someone else.

Now think about the seller’s viewpoint. The cafe owner is in the business because, given the price of hamburger meat, the rent and the wages that must be paid, it is still possible to sell hamburgers at a profit. If rents were higher, it might be more profitable to sell hamburgers in a cheaper area or to switch to luxury lunches for rich executives. The student behind the counter is working there because it is a suitable part-time job which pays a bit of money. If the wage were much lower it would hardly be worth working at all. Conversely, the job is unskilled and there are plenty of students looking for such work, so owners of cafes do not have to offer very high wages.

Prices are guiding your decision to buy a hamburger, the owner’s decision to sell hamburgers, and the student’s decision to take the job. Society is allocating resources — meat, buildings, and labour — into hamburger production through the price system. If nobody liked hamburgers, the owner could not sell enough at a price that covered the cost of running the cafe and society would devote no resources to hamburger production. However, if cattle contracted a disease, thereby reducing the economy’s ability to produce meat products, competition to purchase more scarce supplies of beef would bid up the price of beef, hamburger producers would be forced to raise prices, and consumers would buy more cheese sandwiches for lunch. Adjustments in prices would encourage society to reallocate resources to reflect the increased scarcity of cattle.

A command economy is a society where the government makes all decisions about production and consumption. A government planning office decides what will be produced, how it will be produced, and for whom it will be produced. Detailed instructions are then issued to households, firms, and workers.

Such planning is a very complicated task, and there is no complete command economy where all allocation decisions are undertaken in this way. However, in many countries, for example those in the former Soviet block, there was a large measure of central direction and planning. The state owned factories and land, and made the most important decisions about what people should consume, how goods should be produced, and how much people should work.

Markets in which governments do not intervene are called free markets.

The free market allows individuals to pursue their own self-interest without any government restrictions. The command economy allows little scope for individual economic freedom since most decisions are taken centrally by the government. Between these two extremes lies the mixed economy.

In a mixed economy the government and private sector interact in solving economic problems. The government controls a significant share of output through taxation, transfer payments, and the provision of goods and services such as defense and the police force. It also regulates the extent to which individuals may pursue their own self-interest.

In a mixed economy the government may also be a producer of private goods such as steel or motor cars. Examples of this in the UK include the nationalized industries such as railways and coal.

Most countries are mixed economies, though some are close to command economies and others are much nearer the free market economy. Even countries such as the United Sates which espouse more enthusiastically the free market approach, still have substantial levels of government activity in the provision of public goods and services, the redistribution of income through taxes and transfer payments, and the regulation of markets.

Notes

1. we need not go into these details — нет нужды вдаваться в эти подробности;

2. suppose — предположим;

3. what does this have to do with — какое это имеет отношение к… ;

4. in favour of someone else — в пользу кого-нибудь другого;

5. luxury lunches for rich executives — роскошные лэнчи для богатых;

6. behind the counter — за прилавком;

7. a suitable part-time job — подходящая работа с неполным рабочим днем;

8. conversely — напротив;

9. job is unskilled — работа не требует специального образования;

10. in the former Soviet block — в странах бывшего советского блока;

11. to pursue self-interest — преследовать личный интерес;

12. allows little scope — оставляет мало места;

13. espouse (the approach) — придерживаются (теории).