ABSTRACT
Efficient markets are first introduced. This chapter then analyses three forms of economic organisation – market, command and traditional systems – which can be employed to solve the economic problem of what, how and for whom goods and services should be produced. In the market system, prices are the key allocative mechanism – an automatic and ‘invisible hand’. Different forms of market failure are discussed. In command systems, central planning is the allocative mechanism. Incentives, competition and the objectives of central planners are critical for their success. In traditional societies, allocation of resources is via tradition, which brings stability and cultural identity but also vulnerability to outside shocks. The importance of institutions is referred to throughout the chapter – they can be inclusive or extractive. Other concepts introduced include competition, property rights, legal systems, access to information, reliable currencies, geographical and occupational mobility, quasi markets, efficiency and equity, public and merit goods, creative destruction and the iron law of oligarchy.
