What, How and for Whom in the Free-Market Economy

Smith's laissez-faire capitalism sounds as though it should lead to chaos, not to answers to the three basic economic questions. How can millions of individuals and firms, all intent only on their own self-interest, produce an orderly economic system? One response might be simply, “They can and they do." Most of the industrialized nations of the world exhibit some form of modified capitalist economy, and these economies do work. A better response, however, is that these millions of individuals and firms actually provide very concrete and detailed answers to the three basic questions.

What to Produce? This question is answered continually by consumers as they spend their dollars in the various markets for goods and services. When consumers buy specific products, they are casting "dollar votes" for these products. These actions tell resource owners to produce more of this product and more of the capital goods with which the product is manu­factured. Conversely, when consumers refuse to buy a product at its going price, they are voting against the product, telling producers to either reduce the price or ease off on production. In each case, consumers are giving a very specific answer concerning a very specific product.

How to Produce? The two parts of this question are answered by producers as they enter various markets and compete for sales and profits. Those who produce for a particular market answer the question "Who will produce?" simply by being in that market. Their answer, of course, is "We will.”

Competition within various markets determines which resources will be used. To compete as effectively as possible in the product markets, producers try to use the most efficient (least-cost) combination of resources. When a particular resource can be used to produce two or more different products, then producers must also compete with each other in the market for that resource. And, if the price of one needed resource becomes too high, producers will look for substitute resources—say, plastics in place of metals. The resources that will be used to produce are those that best perform their function at the least cost.

For Whom to Produce? In a market economy, goods are distributed to those who have the money to purchase them. This money is earned by individuals as wages, rents, profit, and interest—that is, as payment for the use of economic resources. Money is therefore a medium of exchange, an artificial device that aids in the exchange of resources for goods and services. The distribution of goods and services ("who gets what") therefore depends on the current prices of economic resources and of the various goods and services. And prices, in their turn, are determined by the balance of supply and demand.

 

I. VOCABULARY PRACTICE

Find antonyms (1-7), synonyms (8-14) in the text to the following words and phrases:

1. public (adj) 8. to try

2. to prohibit 9. profit

3. rarely 10. at wish

4. to accept a job 11. to secure

5. to do good 12. to resolve conflicts

6. to spend money 13. to replace

7. exactly translated 14. to help

II. COMPREHENSION

A) Give words to the following definitions:

1. The system through which a society answers the 3 economic questions.

2. The study of how wealth is created and distributed.

3. An economic system characterized by private ownership of property, free entry into markets, and absence of government interference.

4. Capital goods and the money needed to purchase them.

5. The right to buy any good or service that is offered for sale by producers.

6. A place in which buyers and sellers of a good or service meet.

7. Land, labour and capital.

8. An economic system in which individuals and firms are free to enter and leave markets at will.

9. A person who settles disputes arising from conflicting interpretations of some official acts.

10. An artificial device that aids in the exchange of resources for goods and services.

 

B) Answer the following questions:

1. What economic system is there in the USA?

2. Speak about the history of Laissez-faire capitalism. What are its features?

3. What does the right of private property entitle the owner to do?

4. What is land, labour and capital?

5. What is economic freedom? What does it mean for the owners of land and capital, for workers and for all individuals?

6. What are competitive markets?

7. What is the role of government in this economic system?

8. What are the 3 economic questions that every society must answer in order to set up an economic system?

9. What economy do most of the industrialized nations of the world exhibit?

10. Who answers the questions “What to produce?’ ‘How to produce?’, and “For whom to produce?”?

 

C) Finish the sentences:

1. The 3 basic economic questions are…

2. By pursuing his own interest every individual….

3. For workers economic freedom means…

4. The question “What to produce?” is answered by…

5. If the price of one needed resource becomes too high, the producer….

6. Prices are determined by…

III. DEBATE

Which of the 2 points of view concerning Adam Smith’s famous statements about self-interest do you adhere to? Form two teams. Each team should set forth as many arguments as possible to defend their statements.

Team A Team B

Adam Smith’s statements regarding self-interest are actually statements about greed. The capitalist economic system is effective only because of the greedy behaviour of individuals who are concerned with their own “self-interest”.

Smith did not feel self-interest and selfishness were the same, and people are wrong to believe that they are. Smith meant that it is only natural that every person tries to better his own condition. Also, one person’s gain is not necessarily obtained at the other person’s expense.

 

IV. FOCUS ON GRAMMAR

Fill in prepositions where necessary:

1. According ____ economic theory, every society must decide ____ the answers ____ 3 questions.

2. The American particular answers have provided them _____ a mixed economy based ____ private enterprise.

3. Government should leave the economy ____ its citizens.

4. Entrepreneurs can produce any product and offer it ____ sale ____ the price they choose.

5. Buyers and sellers can enter ____ a market and leave it ____ will.

6. When consumers refuse to buy a product ____ its going price, they are voting _____ the product.

7. The distribution of goods and services depends ____ the current prices of economic resources.

8. If a product is sold ___ high price, the demand ____ this product decreases.

 

 

Planned Economies

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