|Chapter 1: Introduction|
|Economics Systems: Why Do They Matter?|
The first two chapters of the book are new. Chapter 1 compares a market system to
a planned system in the context of the collapse of the centrally-planned economies and their
efforts to build a new economic system. Chapter 2 continues by discussing the role of
government in a market economy, acknowledging that both markets and governments can
Chapter 1 introduces the market system as a coordinating mechanism for the economy,
as a way for society to answer the basic economic questions. After the introduction, it
emphasizes the importance of the division and specialization of labor for economic progress.
This specialization, based on comparative advantage, increases the importance of
coordinating the activities of thousands of firms and millions of people. This motivates the
development of demand and supply analysis to show how markets solve the coordination
problem. Although we emphasize coordination, we also introduce the Marshallian concepts
of demand and supply prices to ease our discussion of efficiency in succeeding chapters.
The chapter goes on to a discussion of information, motivation, and rationing as
aspects of coordination. It shows how the price system coordinates and compares
coordination in a market economy to coordination in a command economy and in a market
with price ceilings. We put off the discussion of the comparative statics of demand and
supply to highlight the coordination achieved by the price system--hiding the tress so that
students can see the forest. The comparative-statics analysis is developed in chapter 3.
The chapter concludes with a discussion of some experiences of the transition
economies. The idea is to convince students that choice of economic systems is important
These terms are introduced in this chapter: