Market Systems in Allocating Societal Resources

Name: Ying Han Student Number: 11AL0740 Topic: Market Systems in Allocating Societal Resources Word count: 1102 (not including the Bibliography) Market Systems in Allocating Societal Resources With the development of society, the availability of resources has become limited. Therefore, it is of vital importance to develop an understanding of resource allocation. A free market (a market in which there is no governmental intervention and regulation) (Wikipedia, online) in this sense, plays a key role in allocating resources.

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In this essay, along with some of the principles of economics, I will analyze the market system and its outcomes, and elaborate on the transformation of the Chinese economic system. Then, I will demonstrate the market system’s benefits and limitations by using the real world example of China’s economic system. The market system consists of three major markets: the product market, the labour market and the capital market. The market system is characterized by a set of interconnecting relations (Dermot McAleese, Economics for Business, 2004), in which price and competition are very important factors.

I am going to take China as an example in the following paragraphs. As is known to us, China’s economy has experienced a transformation from planned economy to a combination of planned economy and market economy. So let us have a glimpse of how the different role market plays in these completely different economic systems. In the early 1880s, planned economy dominated China’s economic system. Planned economy assumes that the wisest and fairest allocation of resources is achieved though government planning of what is produced and who gets it at what cost.

Most enterprises and corporations are initiated and financed by the government. Most resources of production are owned by the state. (Xiaoliang Wei,GRE reference book,2006) In a word, the societal resources are allocated based on the government’s command and instruction. It is the government that decides how many products are needed to be manufactured in the factory and the direction of all the societal resources. Government is a visible hand to control the resources allocation.

For example, in my grandparents’ day, there were no private restaurants, people all went to a public canteen to eat; they did not use money to buy what they wanted. Instead they used tickets which were given by the government to pay for their meals. People did not have choices, all they wanted was to have something to eat. This is one of the examples my grandparents told me to demonstrate how China’s planned economy was in the past. The apparent merit of this kind of economy is that there is no waste in societal resources, because the government plans how much resources should be allocated in every place in advance.

There are no surplus resources, thus economic recession can be curbed under this economic system. Whereas, the drawbacks of it speak for itself, there is no competition in the market. People only have one single choice. Consequently, staffs in the public canteen lose their motivation to improve the quality of the food they provide, and people will not able to get what they like to eat in the long run. In reality, without competition, resources fail to stream to where they should go, and the Chinese economy is doomed.

This type of economy only works at a certain period. Generally speaking, it works well when a country suffers from poverty and severe shortage of societal resources. The potential hazards appear over time, which force China to change the existing economic system, otherwise the economy of China will be hurdled. That is why China brought in market economy. A market economy assumes that free competition produces the best allocation of scarce resources, the greatest productivity and efficiency, and the lowest costs.

Decisions about who does what and who gets what are made naturally as consumers and businesses interact in the marketplace, where prices are strongly influenced by how much something costs to make or do and how much people are willing to pay for it. (Xiaoliang Wei,GRE reference book,2006) Without a doubt, thanks to the market system, resource allocation can be achieved effectively. The benefits of market system are as follow. Market can reflect the variation of supply and demand in time and pass on the information of supply and demand.

In addition, under the condition of market economy, most enterprises and corporations are responsible for their own loss, which automatically forces them to improve the working conditions, technology, and management to survive and blossom in this dog-eat-dog world. As a result, as they make more profit, these enterprises can win more societal resources. Moreover, competitions in the market are able to motivate the manufacturers to improve the existing technology and style of management, which can enhance productivity and direct the societal resources go to where it should.

However, the market system has its problems. To begin with, there are some fields or some resources that cannot be regulated by the market. For example, to provide some public goods, such as national defense, social security, etc. What is more, in order to maximize profits, some of manufacturers are blinded by profit, and they will obtain profits at any cost, which will result in illegal market behaviors, such as counterfeit products. On top of that, if anything goes wrong with the market mechanism, it will take a while for the market to sense this trouble, some serious disasters have happened before being realized.

All these limitations of market will lead to some serious social problems. First, the gap between the rich and the poor will become wider and wider, which might trigger social class conflicts. Second, the fluctuation of the economy will affect people’s daily life. How will people feel when their income is relatively stable, but the price of goods and services keep fluctuating? Likewise, it also will also lead to the waste of societal resources, stocks accumulating in shops, and the surplus stock will have to be destroyed in some manner. Dermot McAleese, Economics for Business, 2004) That is why China didn’t adopt a market economy alone, and lets the government, which is also called the visible hand, to regulate the market system. Because of the socialist policy of China, public ownership is predominant in Chinese society. Letting the market play the primary role in allocating societal resources would not only impede economic efficiency in China, it also goes against the nature of socialism. To summarize, the transformation of China’s economic systems told us that there is no ending in exploring the suitable economic system for every country.

The purpose of societal resources allocation can be boiled down to generally improve people’s quality of life and build a better society for us to live sustainably. Bibliography Akerlof, G. , and Kranton, R. (2000) Economics and Identity. The Quarterly Journal of Economics. CXV(3) McAleese, D. 2004. Economics for Business. 3rd ed. Pearson Education Publishing. ] Wikipedia, 2011. Article of Free Market. [online] Available at: [Accessed 25 Aug 2011 Xiaoliang Wei. 2004. GRE reference book. 1st ed. Qun Yan Publishing.


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