Chapter 2 Economic Systems, Resource Allocation, and Social Well-Being: Lessons From China’s Transition Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Economic Systems Pure Market Economy  Private property rights  Decentralized decision making coordinated through markets Pure Command Economy  State ownership and/or control of economic resources  Centralized planning Mixed Systems  Transitional economy 2-2

Resource Allocation in a Market Economy Market Structure  Purely Competitive Markets  Large number of buyers and sellers  Each seller offers standardized product  Product prices free to move up or down  Buyers and sellers must be mobile  Freedom of entry and exit  Purely Monopolistic Markets  One seller  Imperfectly Competitive Markets 2-3

Demand Price$ Quantity Price ($) Quantity (Six- Packs per Week) $1.501, , D D Law of Demand Other Things Being Equal 2-4

Quantity Demanded versus Demand Quantity D D D2D2 D2D2 D1D1 D1D1 Consumer Income Prices of Related Goods Substitutes Complements Tastes Expectations Number of Consumers Price $ 2-5

Supply Quantity Price ($) Quantity (Cars per year) $5,000250,000 10,000500,000 15,000750,000 S S Price $ 2-6

Quantity Supplied versus Supply Quantity S S S1S1 S1S1 S2S2 S2S2 Cost of Production Prices of Related Goods Seller’s Expectations Number of Sellers Price $ 2-7

Equilibrium Price $ Quantity 3 4 D D S S Surplus Shortage 2-8

Resource Allocation in a Command Economy Centralized Planning  The Communist Revolution in China  Establishment of a Command Economy Problems with Centralized Planning  Initial Phase  Great Leap Forward  State Planning Commission  Cultural Revolution 2-9

Shortcomings of Central Planning Informational Requirements Incentives for Efficient Production Heavy Industry versus Consumer Goods 2-10

China’s Transition to a Market-Oriented Economy Agricultural Reform Industrial Reform Lessons for Other Economies 2-11

China’s Transition to Markets: What Are the Facts? China’s Comparative Economic Performance Since Reform Real GDPCrop Production China8.92%China6.45% South Korea3.31South Korea0.05 Singapore7.66Singapore10.55 Vietnam7.53Vietnam4.63 Low-income4.68Low-income4.10 United States2.57United States1.52 Real Per Capita GDPIndustrial Production China8.00%China11.42% South Korea2.38South Korea5.13 Singapore6.65Singapore8.50 Vietnam6.43Vietnam10.29 Low-income2.53Low-income5.76 United States1.61United States

Problems of Transition in China Unemployment and inflation Corruption Population pressures Pollution problems The desire for democracy 2-13