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How Market Systems Cope With Economic Scarcity Economics Essay

Contrast how a market system and a command economy try to cope with economic scarcity. A market system is also known as the free market economy or laissez-faire economy. In market system, household owns the resources and allocate them in the course of the workings of price mechanism. If there is an increase in demand, the price of a good will rises and it will encourages firms to switch extra resources of that certain manufacture of the good or service. Households depend on their income to determine the amount of products they consume and market value of an individual’s work will decide household’s income. There is a limited role for the government in a free market system. This is because government tries to protect the property rights of people and business via the legal system. Besides, the value of currency can be protected with intervene of government. The result is competition and widely dispersed economic power.

While in the command system, government owns most property resources. The government also gets to make the economic decision through a central economic plan. The central economic planning board determines production goals for each enterprise and specifics the amount of resources to be allocated. The income and wealth distribution is decided by the government too. In this system, market price plays no part in informing property allocation decisions.

For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm’s shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change?

The prices of stock shares always change is because there is supply and demand like everything else. The additional buyers there are for the stock, the higher the price as the supply of stock shares is for all time fixed. On the other hand, then stock prices will go down when there are more sellers.

Both prospective buyers and sellers each of them willing to buy or sell a number of shares base on the stock price in any given stock trading session. If the quantity of shares demanded exceeds the quantity of shares supplied at the current price, the buyers must raise their price offers to encourage sellers to offer enough shares. This situation will cause the price of shares to rise until the quantity demanded equals the quantity supplied. The situation is called the market equilibrium. Now, if there is a report of bad economic news during the shares trading session, the sellers may try to sell out more shares than buyers demanded at the current price. In order to make a quick sale and to find more buyers, the sellers now will lower the selling price of the shares. There will be multiple equilibrium prices going on any trading day, but most of them do not last more than a couple of minutes. In general, demand and supply will affect the change of shares prices.

Price

Quantity

SS

DD

P0

Q0

In November 1998, Vincent van Gogh’s self-portrait sold at auction for $71.5 million. Illustrate this sale in a demand and supply diagram and determine the elasticity of supply of this portrait.

D1

D0

Price

P1

P0

SS

Q0

Quantity

This graph shows a perfectly inelastic vertical supply curve, at the quantity of 1 unit. The downward sloping demand curve intersected the supply curve is used to determine the price of the portrait which is $71.5 million. When the price increases from P0 to P1, the demand will increases from D0 to D1 where as the quantity supplied is remain unchanged. The demand would likely deceases extremely if there is more than one picture presented.

“For years a debate has raged between those who favor strategies for reducing the supply of illegal drugs and those who favor strategies designed to reduce demand for illegal drugs.”

With the aid of two graphs, comment on the situation above using the demand and supply equilibrium analysis.

SS1

SS2

DD

Price

Quantity

P1

P2

Q1

Q2

The graph above shows the relationship between demand and supply curve. When those who favors strategies for reducing the supply of illegal drugs, there would be a shift to the left in the supply curve, from SS1 to SS2. The government tries to reduce the supply of illegal drugs by providing subsidies to farmers. This will encourage formers to shift to other crops such as corn instead of crops that produce drugs. Besides, the increasing of border inspection and interdiction of illegal drugs will also affects the supply curve to shift left and upwards, so equilibrium will not achieve. This is due to the decrease in quantity supplied from Q1 to Q2; the price would increase from P1 to P2. This cause less people will buy because of the increases in price.

SS

P0

P1

Price

Quantity

Q0

Q1

DD1

DD0

The graph above shows the relationship between demand and supply curve. When those who favors strategies for reducing the demand of illegal drugs, there would be a shift to the left in the demand curve, from DD0 to DD1. The curve will shift to the left is because of government has introduce an educational campaign to explain the disadvantages to human health of illegal drugs. When the curve shift to left and downwards, the market equilibrium is no more achieved. The sales of the illegal drugs would reduce because the demand for illegal drugs has decrease from Q0 to Q1.

There are calls from certain quarters proposing that legalizing illegal drugs is the best solution to combating illegal drugs problem. By legalizing illegal drugs, this will increase the amount of illegal drugs available in the market as drug sellers will no longer face prosecution. Addicts benefit too.

With the aid of a graph, explain the situation above using the demand and supply equilibrium analysis.

Price

DD0

P

P1

SS0

Quantity

SS1

Q Q1

Legalizing illegal drugs will lead to the increases in quantity supply. As a result of this, the supply curve will shift to right from SS0 to SS1. When the supply curve shift to the right, the price of the illegal drugs will decreases from P to P’, while the quantity supply will increases from Q to Q’. Besides that, drug addicts gain advantages too not only because of the increases in supply but also the legalization of illegal drugs.

Provide a counter-argument to the explanation given by the supporters of

legalization.

Firstly, illegal drugs should not be legalizing because it will only bring destructive effects to our health. It will cause addiction and it will slowly lead to crime. This is because the price of illegal drugs is not cheap and not many addicts can afford it. As a result of not having enough money, addicts will commit all sorts of crimes in order to get money to buy those drugs. If illegal drugs are supported to be legalizing, there would cause a massive numbers of crime rates in the country. People might use drugs to rape, steal or even start a war. Drugs only benefits the addicts as it will cause problem to the government. Government would have to import those drugs from other country and it surely causes a big sum. This will affect the governments financial and the country’s economy.

Imagine you are selling a new product in the market. Explain more on the product that you are selling from these aspects:

Description of the product that you are selling

The product that I am selling is the new model of touch screen laptop. This touch screen laptop is slim and the weight is lighter than normal laptop. Therefore it is very to carry around. This product is aim towards young adults that are working and students that are still studying. With this product, they can carry to their work place and even to schools. Besides, this product also comes with various colors. Consumers can choose the color of the product according to each liking. This product also includes:

Bluetooth

Built- in GPS system

Webcam

Water resistant

Cold resistant

Support Windows 98/XP/Vista/7

6- cell Li- ion battery

4GB RAM Memory

How the product is produced or acquired

The product is produce in local factory which will be using the modern technology. The internal components for this product will be imported from other country such as America. On the other hand, the external part is supplied by local production. Metal is one of the main resources for this product. Metal is needed in a large amount to produce the laptop. While touch screens are imported from Japan with their high- tech LCD touch screen.

The demand aspect of this product – e.g. pricing strategies, the threat of competitors, factors affecting demand for this product etc.

Pricing Strategies

I would use the Price Skimming method which the price is charged higher because this product will have substantial competitors. The high price is to attract more new rivals into the market. Therefore, the price will fall inevitably due to the increase of supply. The price will be set to RM2500. When there are more competitors in the market, I would now change my strategy to economy pricing.

Threat of Competitors

This touch screen laptop biggest threat is other big company like Acer, HP and also Sony. Although the other competitors are more well recognize, but I believe that my product is better in terms of pricing and functions that are available. Besides, other companies tend to have bigger budget or capital to invest in new product. Therefore it is one biggest threat to my new touch screen laptop.

Factors Affecting Demand

As for the factors affecting the demand would be the consumer’s choices and preferences. Consumer’s taste will be the main factors for the demand curve because it will affect the price as well. Besides, consumer’s income will contribute to the changes on the demand curve of this product too. If their income increases, they would most likely be able to afford this product. As a result to it, the demand for this product will increase.

Elasticity of demand of the product

The demand of the product

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