Answer to Question #166344 in Microeconomics for Bubblys

Question

Under its former President Hugo Chavez, Venezuela moved from a Capitalist economy to a Socialist economy and has remained so after Chavez’s death. For example, government took over and now operates a chain of stores that used to be run as a private business. Prices in the government-run stores are lower than prices were in a Capitalist economic system. The government posts signs in these stores like the one below:

 

In case you don’t read Spanish, the sign says:

                                   Product Description               Diana Oil

                                   Fair Price                                4.73

                                   Capitalist Price                       7.00

                                   Your Saving                            32%

 

The implication, of course, is that prices in a Capitalist economy are not fair. Explain whether or not this is true. Be sure to address each of the following in your explanation:

1) how are prices determined in a market economy?

 2) what does an “equilibrium” price mean in a market economy?

 3) is an equilibrium price a “fair” price?

 4) in a Capitalist economy, what would happen if price were set below the equilibrium price? (that is, if price were set at the “fair” price rather than the “capitalist” price)? 

Answer 1

Solution:

1.).  It is true that prices in a Capitalist economy are not fair. The capitalist model is inherently flawed and the system necessarily creates clear winners and losers in the market. This is because in capitalism market, production is in private hands and the owners accumulate a disproportionate share of wealth and suppress the rights of those they employ.

The prices in the capitalist market are determined by the laws of supply and demand. The production and pricing of goods and services are determined by the free market, or supply and demand forces. A private owner in a capitalist system can have a monopoly on the market and prevent free competition.

The prices in the socialist economy are determined or fixed by the government or the central planning authority. Pricing and production of goods and services depends on the social preferences of the public. This is because in the socialist system, the government regulates and controls the economic system to ensure welfare and equal opportunity to the people in the society.

 

2.). An equilibrium price in a market economy means the price where the desires of consumers and the desires of suppliers agree, that is, where the amount of the product that consumers want to buy is equal to the amount the suppliers want to sell. An equilibrium price is where the supply of goods matches the demand.

 

3.). In a capitalist market, if prices are set below the equilibrium price, the quantity supplied will be less than the quantity demanded. This is because suppliers will not be willing to supply at that price, therefore, quantity demanded will exceed quantity supplied and excess demand or shortages will be incurred.