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 fail.
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 and relevant.

Instructional Objectives
After completing this chapter, your students should know:
1. The questions that an economic system must answer, the essential elements of a market economy, and the importance of coordination.
2. The meaning and importance of the division and specialization of labor, the significance of absolute and comparative advantage, and how specialization makes coordination more important.
3. The laws of demand and supply, the meaning of demand and supply prices, and how the laws of demand and supply interact to lead to market equilibrium.
4. The attributes of a price system--information, motivation, and rationing--that allow it to coordinate.
5. The relative success of a market economy's price system, a command economy's planning system, and a price-controlled economy in achieving coordination.
6. The experiences of transition economies in attaining the five important elements of a market economy.

Key Terms
These terms are introduced in this chapter:

relative price
absolute advantage
production possibilities
opportunity cost
comparative advantage
demand curve
demand price
law of demand
supply curve
supply price
law of supply
excess demand
excess supply
price ceiling

Additional References
In addition to the references in the text, instructors may wish to read or assign one or more of the following:
1. Olivier J. Blanchard, Kenneth A. Froot, and Jeffrey D. Sachs, eds., The Transition in Eastern Europe, National Bureau of Economic Research (Chicago: The University of Chicago Press, 1994).
2. Morris Bornstein, Comparative Economic Systems: Models and Cases, 7th ed. (Irwin: Boston, 1994).
3. Business Week, "21st Century Capitalism," Special Issue, 1994.
4. Paul R. Gregory and Robert C. Stuart, Soviet and Post-Soviet Economic Structure and Performance, 5th ed., (Harper Collins: New York, 1994).
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