Text 7: The American Economic System: What Are Its Goals?

Nation's Economic Goals.There are two sides to the study of economics. One is concerned with describing things as they are. For example, economists can tell us the value of the goods and services the country is producing, the number of people who are employed and unemployed, and the amount of money in circulation.

Economics, however, is also concerned with what ought to be and with designing policies to bring those goals about. The question as to what the goals of American economic policy ought to be is frequently controversial. Each of the following questions, for example, involves economic policy on which people frequently disagree.

▲ Should government increase its aid to the poor and disadvantaged, or should private agencies assume a larger share of the burden?

▲ Should tariffs(taxes on imports) be increased in order to protect certain American industries?

▲ Should efforts be made by government to increase or decrease the power of labor unions?

Society, too, has goals that it tries to fulfill through its public policies. While some controversy exists, most Americans are likely to agree that a list of the nation's economic goals should include the following.

▲Full employment.There should be a job for everyone ready, willing and able to work.

▲Economic growth.Increasing the output of goods and services. With more and better goods and services avail­able, everyone's living standard is likely to improve.

▲Price stability.There have been times when prices in general increased or decreased at a rapid rate. Such times of inflationand deflationare likely to create hardships for many sectors of the economy. Price stabilityrefers to times during which prices remain constant.

▲Economic freedom.We should all have a high degree of freedom to choose how we will earn our livings and how we will spend our money.

▲Economic security.For whatever reason, physical handicaps, old age, accidental injury, or the like, there are those among us who are unable to earn their own way. Economic security means that somehow those who are unable to care for themselves fully will be provided for.

▲Equity.Equity is the quality of being fair or impartial. As an economic goal, it means that the economic system ought to offer all its citizens equal opportunities to achieve their ambitions.

▲Efficiency.Efficiency is a measure of how much we get for what we use. As a national goal, economic efficiency refers to the entire economy's ability to get the most out of its limited resources.

Text 8: Prices In A Market Economy

Prices perform two important economic functions: They ration scarce resources, and they motivate production.

As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe this as the rationing effect of prices. In other words, since there is not enough of everything to go around, in a market system goods and services are allocated, or distributed, based on their price. Did you ever attend an auction, or see one conducted on TV? What you saw was the rationing effect of prices in action. The person leading the sale (the "auctioneer") offered individual items for sale to the highest bidder. If there was only one item, it went to the single highest bidder. If there were two items, they went to the two highest bidders, and so on.

Price increases and decreases also send messages to suppliers and potential suppliers of goods and services. As prices rise, the increase serves to attract additional producers. Similarly, price decreases drive producers out of the market. In this way prices encourage producers to increase or decrease their level of output. Economists refer to this as the production-motivating function of prices.

But what causes prices to rise and fall in a market economy?

Demand

As the winter draws to a close, many clothing stores find that their inventories (stock of goods held by a business) of ski and other winter clothes are too large. How can you get people to buy ski clothing and other winter items in March and April? Did you say, "Run a sale"? That would be a good suggestion, because people will buy winter clothing in the spring if the price is low enough.

The Law of Demand. Demandis a consumer's willingness and ability to buy a product or service at a particular time and place. If you would love to own a new pair of athletic shoes but can't afford them, economists would describe your feeling as desire, not demand. If, however, you had the money and were ready to spend it on shoes, you would be included in their demand calculations.

The law of demanddescribes the relationship between prices and the quantity of goods and services that would be purchased at each price. It says that all else being equal, more items will be sold at a lower price than at a higher price.

Text 9: Alfred Marshall (1842-1924)

Price Theory Pioneer

The great English economist Alfred Marshalls textbook, Principles of Economics (1890), and the doctrines that it discussed, became the standard for the teaching of that subject until well into the 1940's. Marshall spent most of his adult life as a professor of economics at Cambridge University. His most famous pupil, John Maynard Keynes, described Marshall as "the greatest economist of the 19th century." Interestingly, Keynes went on to become the most influential economist of the 20th century.

Marshall is best known for the order that he made out of the theories of the earlier "classical economists" like Adam Smith, David Ricardo and John Stuart Mill. ("Classical" is the name given by modern economists to the theories of those whose views were most widely held during the 75 years following the publication of The Wealth of Nations.) Despite the passage of 100 years since the publication of his Principles, his analysis of market forces is still relied upon to explain economic events.

In Marshall's world, economic events could be explained in terms of the equilibrium market price resulting from the interaction of supply and demand. One of Marshall's lasting contributions was differentiating between supply and demand in the short run and the long run. Comparing die two forces to the blades of a scissors, he argued that neither could func­tion without the other. But, just as (depending on how the scissors is held) one blade can be more active than the other, so supply and demand vary in importance in the long and short run. In the short run, the quantity of available goods is more or less fixed (because crops have been planted, production schedules set, etc.). Therefore it is the demand for those items that will be most influential in determining their price. In the long run, he went on, the opposite is true. Both farmers and businesses can add to or reduce their production facilities as the needs dictate. In that way the supply side of the market becomes most influential in deter­mining price.