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How Economic Systems Attempt To Allocate Resources Economics Essay

The assignment discusses the economy of china that is influencing the market decisions worldwide. It starts with defining three different types of market economies followed by the chosen economic approach of china. The impact of fiscal and monetary policies on business organization (zong) is discussed and the impact of its competition policy, government intervention, government agency (PTA) and pressure groups (employee unions) are evaluated

The economic problems encompass scares recourses for production and unlimited wants of consumers. To cope with these problems a business must consider answering the three main “Wh” questions satisfactorily i.e. What, Why and for whom to produce. Economic recession creates a deep darken pool for the world economy, the strongest of which eventually survives. The impact of economic recession on china’s popular businesses has been studied and the problems are addressed followed by the reasons as to why businesses prefer to operate in the markets where the demand is relatively inelastic. A business can seek to create such market condition by having monopoly price inelasticity and by providing those products which are habitual having a very a larger demand.

Task for P1

Explain how economic systems attempt to allocate resources effectively in case of China.

Different types of economies:

There are different types of economies and different countries use their different types

The Free Market Economy

Command Economy

The Mixed Economy

The Free Market Economy:

This approach is also known as capitalism. In this type of economy the supply and demand of the goods and services are determined totally by market values rather than the government. This is a type of economy where price, supply or demands are distorted by the regulations of government.

Command economy:

Also known as controlled economy. This is an economy where both the supply and price are controlled by the government rather than the market forces. Government decides which good or service should be produced, how should it be produced and for whom it shall be produced.

The Mixed economy:

This economy is controlled both by the government and the market. Free public hospitals are controlled by the government as it has a social motive where as the industries are controlled by the market as it is for profit motive but government still influences to some extent. Most of the developed countries use this type of approach.

P1.2 Economic Approach of China

China was first a Command economy but in 1990’s they released majority of sectors to enterprises. China then started to approach the free market economy. This is the type of economy where the market economy is based upon an ideology that assumes that consumer choice will influence market forces to ensure an optimum allocation of resources with no need for interference from the government. The only role of government is to ensure that the invisible hand of market forces is free to operate via the price mechanism or forces of supply and demand.

Some problem with this approach is that there is inequality of power in marketplace, Barriers restricting entry to the market place and the immobility of factors of production and Producers may ignore externalities

How resources are allocated in free market economy in china.

Consumers and producers take prices as a symbol in a free market. When the product prices raises as compared to another product on the customer behalf. The purchased products should be rationed by the consumer. In other words, every product should be treated dearly due to higher cost at which they are purchased. A great revenue opportunity is gained by the producers when the price of specific products goes higher. By the government there is low intervention in the market in the free market economic system which causes waste of market forces. China has the world’s successful economy. In china allocation of resources is done mostly by the private sector, the producer sets the price of their products according to the demand of their product and the chinies government does not enforce restrictions on the prices. In china resources are allocated according to the demand. In short, the Free Market leads to an efficient allocation of resources because prices are continually fluctuating, demonstrating scarcity and surplus through the actions of millions of individuals.

Task for p2:

Assess the impact of fiscal and monetary policy on business organizations and other activities

P2.1: Policy

A way of expressing a broad way purposes of govt. activity in a particular field with some desired outcomes in mind.


Policy may be a specific proposal

Policy may establish procedures to achieve specific objectives such as parental choice in education of students

Policy may be a vague direction for a change with no specific outcome intended.

Fiscal policy: Fiscal policy is basically used for the betterment of a society or a country or a nation, it works for the development of the economy of any state .it generates its own funds via taxation and the revenue generated by the government is spent on the state in its different fields like education ,employment ,constructions and medications etc . The amount of revenue collected is less than the amount budgeted, the country is said to be running at a deficit and issues debt (notes and bonds) to make up the difference. There are three types of fiscal policy which are mentioned below

1. Neutral fiscal policy: this is undertaken when economy is in equilibrium. Here the government spending is completely funded by the taxes.

2. Expansionary fiscal policy: this is undertaken in recession. This is when the government spending increase than the taxes collected.

3. This is used to pay the debt taken by government. This occurs when the tax revenue exceeds the government spending

Monetary policy: The change in supply and demands of any states economy is known as the monetary policy of that state. The interest rates given by any states increases or decrease by the need of their money which makes the money available easily. Due to the availability of money the economical activities of the state increases or decreases.

P2.2: Assess the impact of fiscal and monetary policy on business organization

Zong is a china mobile company operating in china and Pakistan.

Impact of fiscal and monetary policy:

The impact of fiscal and monetary policy is straight on nation’s economy which is being implemented by the government of the nation. In fiscal policy money is first collected through taxation and then spent on the nation’s development and its welfare, while in monetary policy the money is directly proportional to the supply and demand. These both policies have a huge impact on any business organization. Here I have selected ZONG cellular network company to show the impact of these policies how they affect any business organization.

Impact of fiscal policy on ZONG:

Fiscal policy has its own impacts on the ZONG cellular network company, ZONG is affected by the fiscal policy in the form of double taxation which is there by implemented by the government in which the ZONG company have to pay its tax and after that the employees have to pay their individual tax too. If the government raises tax rates then the customer are also directly affected by face higher rates of the product. This policy also affect the company and as well as the national economy in the form of less investment and also less employment.

Impact of monetary policy on ZONG:

Monetary policy has its own impacts on the ZONG cellular network company, ZONG is affected by the monetary policy in the form increase or decrease in investment, it also affects the supply and the demand of the product .if supply is in huge quantity and there is no demand it would also affect the company growth and if there is more demand in the market and there is lack of supply due to investment which cannot be provided in time it would cause lack of opportunity for the company.


The monetary policy have a huge effect on the overall economy of any nation it all also effects business organizations by lacking them to have an opportunity to avail credits for their further investments. in contractionary monetary policy it higher the interest rates which reduces the supply of money and it gets harder for any business organization to be financed by other sources, where as in expansionary monetary policy it provides lower inters rates so for any business organization it gets easier to be financed by other sources and the organization can avail a lot of new opportunities.

P2.3: Impact of fiscal and monetary policy on other activities

In fiscal policy the government either changes the level of taxation or the level of spending. If government increases the level of taxation so people will be left with little disposable income so they will spend less. As a result spending in the economy will fall. Raising taxes will also affect the producers as well because when taxes are raised people pending falls this means the demand for products falls and thus the revenue falls. However if the tax is reduced and the government spending is increased people will have more money this will increase the aggregate demand in the economy in order to cope with this high demand producers increases their operations for this they hire more labors so with this the unemployment rate also falls. Expansionary fiscal policy also decreases exports.

In monetary policy the monetary authorities control the money supply by often varying the rate of interest. If government increases the interest rate so people will not borrow money from banks for the purpose of starting new businesses or buying house etc. this is because they know that when they’ll return the loan they will have to pay a higher interest rate so as a result new entrepreneurial activities stops. There will be also downward pressure on spending in the economy. This will hit the producers as well because they will face a fall in demand and thus fall in revenue. High interests will also attracts great inflows of money because people from outside will put money in banks of that country in order to get higher rate of return on it. Same will be the case with domestic people they also will put money in banks for high return and this again will decrease the spending in the economy. However if the interest is lowered so people will start taking loans from the banks and they will start investment, this also will increase the spending and producers or firms will experience an increase in their demand. As a result the unemployment rate will also fall because the producers will hire more labors in order to cope with the demand.

Task for p3

Evaluate the impact of competition policy and other regulatory mechanisms on the activities of a selected organization.

Competition policy covers the different ways in which the competition authorities of national governments and also the European Union seek to make markets work better and achieve a higher level of economic efficiency and economic welfare. Competition policy ensures that there are many choices for customers. In competition policy there is effective price competition between suppliers. Competition policy has some pillars which are discussed below.

Antitrust and cartels. This includes finishing all those agreements which damage and stop competition to take place such as cartels.

Market liberalization .This is involves introducing competition in those markets where there is a monopoly. Like this monopoly will be finished and people will have more choices.

State aid control. Government often offer grants to state industry which is in loss and which is not in demand. Such operations can damage competition. So this third pillar involves prohibition of grants to such businesses which has no prospect of long term recovery.

Merger control. Some two large firms get together through merger and like this they finish competition. This pillar involves restricting mergers and takeovers.

The aim of competition policy is “promote competition” so if this policy is imposed zong will be affected. zong will have to come up with new packages will have to lower call rates every time in order to gain market share from its competitors. With the competition in the market zong will use the penetration pricing strategy where prices are kept very low. Zong will also have to bring technological innovation which promotes gains in dynamic efficiency and will have a wider consumer choice in markets for goods and services. Other regulatory mechanism also had an impact on zong. Other regulatory mechanism includes government agencies, pressure groups and government itself. Zong faces major loss because of government intervention. Recently government has intervened and has blocked the mobile service on regular basis in Pakistan in these days of complete shutdown zong does not make any sale it is a serious loss. The government agency Pakistan telecommunication authority also had a great impact on zong they are bound to accept the rules of PTA as now they cannot sell their sim connections at every place and every shop. As now because of the new rules of PTA the network connections can only be sold out at their franchises. This made a drastic impact on zong i.e. zong has experienced fall in their sales. PTA also pressurizes them to maintain certain level of quality network coverage. The pressure groups also had an impact on zong. The pressure groups like employees’ unions have a great impact as well they want zong to safeguard the rights of employees. So zong works hard to safeguard the rights of employees by giving them better working condition, paying good salaries, and providing them with good incentives this is because of the impact of the pressure group employee’s union’s. Zong does this because they know that if they fail to do so the pressure group will take an action.

Task for m1

What is meant by the economic problem and its three constituent parts? Why do we need to consider these three parts when assessing the efficiency of business behavior?

M1.1 what is meant by the economic problem and its three constituent parts?

All the societies whether they are advanced or in transaction stages face the economic problem. Economic problem is that how to make good and best use of scarce or limited resources. This economic problem is because the needs and wants of people are unlimited but the resources available to fulfill them are limited. As the resources are limited so the producer has to make a choice and make use of the concept that is opportunity cost.

Opportunity cost and choice is two important concepts in economics. As the resources are limited producers will have to make choice between competing alternatives. Making an economic choice means that u have sacrificed other alternative. For e.g. if there is a piece of land you can either build a new school or a hospital on it if you pick the choice of making hospital than the opportunity cost of it would be a new school. The loss of the next best option is called opportunity cost.

Three constituent parts of economic problem

1: what to produce?

To meet their needs societies must decide that what is the best combination of goods and services which should be produced in order to meet their needs . For e.g. what amount of resources should be allocated to the production of capital goods and how many resources should be allocated towards the production of consumer goods or how many resources should be allocated for schools and defense.

2: How to produce?

After deciding what to produce than the societies’ will also have to decide that what should be the best combination factors of production to create the decided outputs of goods and services. For e.g. how much labor, capital, and land should be used to produce consumer’s goods like motor cars etc.

3: For whom to produce?

This is often called the problem of distribution. After the societies have decided what to produce and how to produce after this finally the societies have to decide that how much and who will get the output produce and in what quantities for e.g. who will get the computer’s and cars produced.

M1.2 why do we need to consider these three parts when assessing the efficiency of business behavior?

It should be always taken in to account weather the business is efficient or not. To asses that the business is efficient or not the above mentioned three parts of economic problem should be considered. If all of these three questions have been answered appropriately and the right decisions have been taken this reflects that the business is efficient. For e.g. if the producers have produced that products which are in demand and will meet the need of societies in best possible way so it can be concluded that the business is partially efficient. Than after this if the producer have chosen the correct combination of factors of production which he chooses to produce the products that are in demand this also will help to identify that the business is doing well. Finally if the producers have taken in to account that who are the buyers of their product and have identified that how much should be provided to each customer according to their needs and have chosen the appropriate ways of distribution so this reflects that the business is efficient.

Task for m2

How will an economic recession generally impact on businesses and which businesses will be likely to cope best in such difficult trading times?

M2.1 how will an economic recession generally impact on businesses?

Economic recession is when the growth slows down mainly because of decrease in consumer demand as a result sales start dropping and also the businesses stops expanding and soon stops hiring new workers. By this time the recession is usually underway. During this period unemployment starts increasing and the consumer purchasing power also falls due to which the purchases starts falling even more unemployment rises, and consumer purchases fall off even more. When the GDP growth is negative for two consecutive years or more this period is termed as the period of economic recession.

Impact of recession on large businesses such as large manufacturing business

In recession period as sales revenue and thus profit decreases the manufacturer will stop hiring new employees. In order to lower down their costs the manufacturer might stop carrying out research, buying new equipment’s and technology, development and also stop introducing new products. The expenditure for advertising and marketing may also be reduced.

1: falling stocks and slumping dividends.

As result of decreasing revenues the stock price of manufacturer also falls. dueto low demand the manufacturer will also keep less stock as they had a fear that the stock will become obsolete. Dividends might also slump or completely disappear in case of severe this period as the company is going through a tough time and is facing difficulties so the shareholders may also become upset and they along with the board of directors can call for new ceo hoping that this will solve the problem.

2: credit impairment.

Recession has also an impact on account receivable. The customers that have to pay to the company might make the payment late, slowly or might not pay them at all. This will affect the company. With reduced revenues the affected company will delay the payment of its own bills or they will pay it in smaller increments than what was agreed in original credit agreement. The ability to obtain financing and the valuation of corporation’s bonds, debt will reduce due to delayed payment. The company ability to pay interest on the money which it has borrowed from banks might also be impaired due to this the company will be termed as “defaulted company”. This will damage the credit worthiness of the company and will prevent the company from any further borrowings.

3: Employee layoffs and benefit reductions

in recession the business cut off those employees which are least required or who have fewer skills and so more work is assigned to few people. With this the productivity of each worker might increase but this also demotivates the workers as workload is increased andwork becomes harder, working hours becomes longer, the increases in wages are stopped, and the employees has a fear of further layoffs. As the period of recession increases in length so the labor and management might meet and agree to compromise on wage and benefits in order to save jobs and the company. In recession the manufacturing company may be forced to discontinue those products which are not selling and might also be forced to close the plant.

4: cuts to quality of goods and services.

In order to reduce the cost and maintain profits in period of recession the businesses start compromising on the desirability and quality of its product. This is commonly practiced by big businesses in period of steep recession. In recession for e.g. airlines lower their standards they might install more seats in the plane cramping the passengers. Routes to destinations which are less profitable Airlines may be cut resulting in inconvenience for the customers. Food companies’ starts offering fewer products for the same price and they also reduce the quality as well.

5: reduced consumer access

in period of recession as firms spend no or very little money on advertising and marketing so as a result huge advertising agencies will be squeezed. The decline in advertising expenditure will wash away the profits of huge media companies in every division (broadcast, print or online)

consumer confidence declines due the effects of recession, continuing the recession as the spending of consumers decreases.

Impact of recession on small businesses

Recession also has a great impact on those businesses which has less annual sales and which are not public limited companies thus small businesses. Small businesses find it very difficult to survive in hard time in recession period as they don’t have large capital assets and major cash reserves. So because of this bankruptcy rate in small businesses is higher than large businesses. 

Small businesses which are bankrupted and are serving the society produce hardships not only for the owners but also for the society as well. The entrepreneurs who wanted to start the business are also discouraged by the businesses which are bankrupted. And in recession people will also stop taking loans from banks or other financial institutes for stating new small businesses. So the investment in economy will also fall drastically.

M2.2 which businesses will be likely to cope best in such difficult trading times?

Recession means that economy is in reverse and is not growing. All the activities and operations are affected negatively during recession. But there are some businesses which may feel no or little impact of recession and they can cope with recession. These businesses are called recession proof businesses. However there are few businesses that can cope with recession and are discussed below.

Funeral home directors are not affected by recession that much. This is because the death rate has nothing to do with recession. It will not fall during recession and people will still die .recession won’t have much impact on deaths. So the demand for those product which is needed for the funerals will not fall even in recession period. Every religion has its own way and culture to deal with the dead ones and the culture will not change even in recession.

Health care businesses also do well in recession periods. This is because in recession people get sick even more than good economic time periods. So people do care about themselves and when they get sick they want to get out of it and get healthier for this they take services of health care companies even if there is recession going on. So health care companies does not experience a drastic fall in their demand even in these difficult times. The small businesses like clothes-dry clean businesses also do well in recession as people can’t dry clean their clothes at home.

That business which has low fixed cost and that can survive on a shoestring also does well in recession period than those businesses which has high fixed costs. Those businesses which provides inexpensive products does very well in these hard times and even often experience growth in their sales for e.g. in America Cadbury experience 30% increase in their sales in the period of recession in 2008 by providing inexpensive sweets to the customers. A business that provides inferior goods is also not affected by recession because the people switch to inferior goods and there is a high demand for inferior goods. The demand for bankruptcy lawyers also increases in recession because many people files for bankruptcy. Businesses which provide those products that without which people can’t survive also cope best with recession.

Task for d1

Why might businesses prefer to operate in markets where the demand is relatively price inelastic and how can businesses seek to create such market conditions?

D1.1 why might businesses prefer to operate in markets where the demand is relatively inelastic

Demand refers to the quantities of a product that purchasers are willing and able to buy at various prices per period of time, other things remaining constant. Price elasticity of demand is the responsiveness of quantity demanded to a change in price. When the quantity demanded is relatively unresponsive to change in price this demand is called inelastic demand. Those products which have inelastic demand will have coefficient less than 1.businesses prefer to operate in those markets where the demand is inelastic because in such markets they can practice price discrimination. Price discrimination is where the firms charges different prices to different customers for the similar goods, like this they increase their profits. Apart from this the businesses will want to operate in such markets where demand is relatively price inelastic because they can charge high prices. In such markets if they raised the price it won’t affect the demand so the firms will still enjoy high profits and will maintain their sales.

The other reason that businesses prefer markets where the demand is relatively in elastic is the amount of tax borne. When tax is imposed on the firm by government and the demand is price inelastic so the producers can pass on the main part of tax on to consumers in form of high prices as they know that if they raise the price people will still buy as the demand is in elastic and that they will not lose many sales.

D1.2 how can businesses seek to create such market conditions?

Businesses like to operate in markets where the demand is relatively price inelastic. Businesses always are interested to create such market condition where demand is price inelastic. Businesses can create such market conditions in various ways which are discussed below.

Firms can create such condition if they have a monopoly. Monopoly is a situation where a single firm or a group owns all or mostly all of the market for a particular service or product. Monopoly occurs when there is no competition. A pure monopoly exists when there is a sole supplier of a particular product. In these conditions firms can rule the market and set a price of their own likeness this is because the people will have to buy whatever the monopolist is selling as the monopolist is the only firm supplying the product so the demand in monopoly situation will be price inelastic.

Businesses can also create such conditions where the price is relatively in elastic by producing and offering such products which is superior from other products which has superior features and which has more uses and is well defined so in this case such products will have very few or no substitutes at all. Products which don’t have substitute will have inelastic demand. By providing such products which don’t have substitutes the businesses can create such condition where the demand is price inelastic because the people will still buy those products which don’t have substitute even it its price is raised because they don’t have any other choice but to buy the product.

Businesses can also create such conditions by providing those products which are habitual and one can’t live without it. Products which are habitual have in elastic demand. Such conditions in which demand is price in elastic can be produced if the firms produce and offer products which are the basic needs of people for e.g. cloths and flour people need these goods and will even buy if its, price is increased so providing such goods businesses can create such conditions. By producing luxurious product businesses also can create such conditions where price is demand in elastic. Luxurious goods are not purchased by everyone these products are only purchased by rich people and they are ready to buy them even if their prices are set very high. This is because rich people are not worried too much by the increase in price.


samuelson, p. (n.d.). Retrieved december 30, 2012, from economicsonline

invetopidia. (2008, october 13). Retrieved december 30, 2012, from invetopidia

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