PH

Chapter 2 - Principles of Microeconomics

Fundamental Economic Questions

  • \textbf{Q1: What to Produce?}
    • Allocation of resources; decision‐maker can be individuals (markets) or planners.
  • \textbf{Q2: How to Produce?}
    • Choice of technology (labor- vs capital-intensive) and social organization of work.
  • \textbf{Q3: For Whom?} (distribution)
    • Must set criterion: merit, need, equality, rank, power, lottery, queue.
  • \textbf{Q4: Growth & Development} (modern add-on)
    • Populations now demand rising living standards; failure ⇒ political cost.

Distribution Mechanisms—Key Takeaways

  • Merit (contribution) = core of capitalist & socialist practice.
  • Need = ideal of communist principle; large incentive & measurement problems.
  • Equal share, lottery, queuing = historically rare / default.

Types of Economic Systems

  • Hunter-Gatherer, Slave, Traditional/Village ⇒ pre-capitalist; limited growth, follow 90\text{–}10 rule (≈90\% in agriculture).
  • Capitalist ⇒ private economic property, free labor, markets decide, distribution by contribution, growth via profit motive.
  • Socialist ⇒ collective (state) ownership, free-but-state-dependent labor, central planning replaces markets, distribution by contribution; communism aspires to need-based distribution.

Core Capitalism–Socialism Contrasts (5 point memo)

  1. Property: private vs collective (state).
  2. Labor: free choice vs free but single employer.
  3. Mechanism: markets vs planning (imperative).
  4. Decision unit: individuals vs planners.
  5. Distribution: contribution via prices vs contribution (socialism) → need (communism).

Planning in Practice (USSR)

  • Annual TECHFINPRO plans for ≈200{,}000 enterprises + farms, stores, banks.
  • Max 2{,}000 product categories; manual “material balancing” with ≤13 iterations; objective = balance, not optimum.
  • Managerial dysfunction: agents distort output mix to hit ruble targets (e.g., book size games).

Incentives & Freedom Issues

  • Need-based share kills work incentives; hard to define “need”.
  • State monopoly on jobs limits true labor freedom.
  • Friedman: political liberty requires economic freedom.

Historical Milestones

  • Agricultural & Industrial Revolutions break 90\text{–}10; launch growth, middle class.
  • Smith’s 1776 “Wealth of Nations” starts positive economics; advocates laissez-faire.
  • Business cycle first recorded in Britain 1790s; Juglar 10-yr cycle.
  • Great Depression (1929) births macroeconomics; USSR grows rapidly 1930s, stalls after 1960.
  • China post-1978 market reforms ⇒ ≈9\% real growth.

Why Study Both Systems?

  • Economic structure drives macro outcomes.
  • Socialist ideas recur; understanding past avoids “re-inventing a broken wheel.”