Scarcity in Different Economic Systems
Planned Economies (Command Economies)
- Resources are allocated for the benefit of the state rather than individuals.
- Rationing: The government might use rationing systems to distribute scarce goods, like food or clothing, equally among the population.
- Production Focus: The government might prioritise specific industries deemed crucial for the nation, even if consumer demand lies elsewhere.
Advantages: This system can prevent extreme poverty and reduce inequality, as the government can ensure that resources are distributed more evenly.
Disadvantages: They are not allocatively efficient. Planned economies struggle with allocating resources efficiently because they rely on predictions instead of real-time consumer choices.
👩🍳 Imagine a bakery only baking what planners think people want, not what they actually buy. This can lead to shortages of popular items and gluts of unwanted ones, wasting resources and leaving people unsatisfied.
A glut means there is too much of something. In other words, the supply of something exceeds demand, i.e., there is an oversupply.
Planned economies predict demand for goods, but without the constant feedback of consumer choices, mistakes happen. They might overestimate how much people want something, leading factories to pump out a glut (a big excess) that nobody buys.
China: In the late 1950s, China's Great Leap Forward, a centrally planned economic push, aimed to rapidly increase agricultural production. However, inaccurate estimates and unrealistic targets resulted in a glut of some crops, while others remained in short supply
Read more about this here:
Market Economies
- Price Mechanism: Prices are determined by the interaction of supply and demand. If a resource is scarce, its price will rise, signalling to producers to produce more and consumers to consume less.
- Competition: Businesses compete to provide goods and services, leading to innovation and efficiency. This helps to allocate resources to their most valued uses. Resources (labour, materials) are allocated based on market forces - businesses invest in producing goods and services with higher demand and profitability.
Advantages: Market economies are often very efficient at producing a wide variety of goods and services and encouraging innovation.
Disadvantages: Without government intervention, there can be significant inequality, and some essential services (like healthcare) might be underprovided.
Hong Kong, a densely populated city with limited land, is a prime example of how a market economy adapts to scarcity. One innovative solution is the rise of vertical farms. These are indoor farms that stack growing layers vertically, maximising crop yield in a minimal footprint.
How it relates to scarcity:
- Limited Land, High Demand: Hong Kong has limited land for traditional agriculture, but the demand for fresh, local produce remains high.
- Market Forces Drive Innovation: The high cost of land incentivises businesses to find creative solutions like vertical farming. This allows them to meet consumer demand for fresh produce while overcoming the challenge of limited space.
Read more about it here! 👇
Mixed Economies:
Scarcity management:
- Government and Market Balance: The government intervenes in certain areas, especially to provide public goods and services, such as education and healthcare, and to regulate the market to ensure fairness.
- Private Enterprise: Individuals and businesses are free to produce and sell goods and services, with market forces determining prices and production levels.
Advantages: This system allows for a balance between economic efficiency and social welfare. The market can respond to consumer demands while the government can step in to correct market failures and provide for public needs.
Disadvantages: The challenge is to find the right balance between government intervention and market freedom, which can sometimes lead to inefficiencies or overregulation.