When the Soviet Union, which had been a command economy, broke apart, an officia

Question

When the Soviet Union, which had been a command economy, broke apart, an official of the new Russian government called an official of the American government and asked” “Who is in charge of bread distribution?”

it took a few minutes for the American official to fully understand the question. But when he did, he answered: “No one.”

The Russian could not understand that. How can wheat be grown, ground into flour, baked into bread and distributed to stores without the government telling everyone what to do? Use your knowledge of supply and demand, the Invisible Hand (the price system) and free markets to explain to the Russian official how this process works. You don’t have to do it all in one post. Instead you may wish to discuss one market at a time or, perhaps, explain the Invisible Hand and the Price System in one of your posts.This is a true story. The Russian government really did call America and ask how to distribute bread in a free market system. How that is done is so normal for us, that we probably don’t even think about it. But now is a good time to think about it and obtain a better understanding of free markets, the Invisible Hand, the Price System and supply and demand.

Consider the multiple steps (markets) involved in producing and distributing the loaves of bread that you find in your local supermarket. Explain to the Russian official how the free market accomplishes this rather impressive task.

Since multiple markets are involved, you probably will want to examine different markets in different posts.

Explanation / Answer

  
Phenomenon of invisible hands will help the Russian to understand the intricacies of the economic system and a market based economy. As per the concept of invisible hands, individual action for the benefit of oneself creates social benefits for the others.

In the given scenario also, people having land and resources in Russia would like to produce something out of the lands. Here, they will identify the products in demand and accordingly hire workers. Now, workers will be paid the salary and wages for their contributions. Later on, workers will buy the products and spend their earnings. In this way, a two sector economy is created. Slowly, demand for new products are created and it is served by the production of new products in the market. It establishes the aggregate demand and aggregate supply and equilibrium between these two. And economy starts growing.
Here, invisible hand causes land owners start production. In return, it benefits others as people get employment and wages. These incomes are again spent on goods. It creates income for the producers. Thus, the actions of each other benefits each other also.

Later on government and regulatory bodies are formed to oversee the well-being of the economy and prevent evil forces to exploit the market players. It is further strengthened by international trade between two economies and the development of different market structures in one economy.

As per the free market, demand of product is met by the supply of product. Bread manufacturers hire workers to produce breads and pay them the salary and wages. Later on, these breads are sent to the market and are purchased by people. Thus, circular flow of income takes place between two sector names as firms and households. As the demand of bread increases, the supply of bread also increases. Thus, new employment opportunities are created. It broadens the size of the economy.

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