Question

The second most important economist of the 20^th Century (in terms of influence) was Milton Friedman. In his lecture (video below) he explains that no one actually knows how to make a pencil, which will probably sound strange to most.
Watch from about the 0:40 second point to approximately 6:00 minutes and answer all of the following questions:

Why does no one know how to make a pencil?

What is the ‘miracle’ that allows pencils to be made (in your response you should use/define the following terms: specialization, self-interest, competition, mutual gains from trade, market coordination, and the price mechanism.

Would it be more difficult for a command economy to make a pencil?

Answer 1

No one person has all the knowledge needed to do all the things involved in making pencils. It takes the combined knowledge and skills of number of people.

The miracle that allows pencils to be made is that the efforts, patience and knowledge of millions of people are brought together automatically without force or a master planner is exactly the right way needed to produce pencils.

Specialization:

Economic actors concentrate their skills on tasks at which they are most skilled. Specialization has both macro and micro applications.

Self interest:

Focussing on activities that are benefit to individual or the organization.

Competition:

When one of the business customers is trying to win over the other business customers by offering different kind of products and deals

Mutual gains from trade:

In economics gains from trade are net benefits to an agent and trade is mutually beneficial.

Market coordination:

Interaction of demand and supply in market generates price signals that causes an ongoing spontaneous coordination.

Price mechanism:

A system of price determination and allocation of goods by free market forces.

Yes, with command economy it is difficult because you cant play around like one can do with mixed market economy you either have 100 percent of economy centralized in hand of state.