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The Fundamental Economic Problem Of Scarcity Economics Essay

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Published: Mon, 5 Dec 2016

Market system, also known as capitalism is a system of allocating resources based only on the interaction of market forces, such as supply and demand. It is a true market economy and free of government influence, collusion and other external interference. In this system, there are many advantages and disadvantages. One of the major advantages is that market system can adjust to change easily. If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government protocol first. One of the major disadvantages is that it doesn’t always provide the basic needs to everyone in the market. The weak, sick, disabled, and old sometimes have trouble providing for them and often slip into poverty. In term of having the scarcity, they have to solve this problem. What to produce? In market system, the firm will produce the product which has the highest demand compare to others. This can rise up their profit to the maximum. How to produce? In the market system, in order for them to maximize their profit, they have to maximize used up the resources. In solving this problem, the firm has to decide to use whether a production technique will be more or less capital-intensive. For whom to produce? If consumers are willing and able to pay a given price for a good or services, they can buy it. Consumers who are unable or unwilling to pay a given price for an item will not get one.

Command economy, known as planned economy is an economic system which the government control the economy. It is an economic system in which the central government makes all decisions on the production and consumption of goods and services. One of the advantages is that equality is focused on. The government tries to eliminate all private property and distribute its good equally. If it is done correctly, no one is in poverty and no one is wealthier than another. One of the disadvantages is there is very little freedom. The individual usually doesn’t have the opportunity to decide what they want to do for a career, and they have no control over the goods they receive. In this command economy, the central authority or agency draws up plans that establish what will be produced and when, sets production goals, and makes rules for distribution. The government will used more capital-intensive so it can create more jobs for the people around. All the goods and services are for everyone in the country because in command economy, everyone is treated as the same.

In other word, different economic systems have the different role or ways to rule the economy, but they advantages and also disadvantages at the same time. They also have their ways to overcome the scarcity by using the three basic economic problems; what to produce? How to produce? And for whom to produce?

The price elasticity of supply (Es) is defined similarly to the price elasticity of demand. It is to measure the responsiveness of the quantity supplies of a commodity to a change of its price. Supply elasticity are generally positive; this is because the law of supply states that when the price of the good increase, quantity supply of the good will also increase. The formula to calculate the price elasticity of supply (Es) is as follow:-

One of the determinants of price elasticity of supply is availability of raw materials. If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand quickly by supplying these stocks onto the market – supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher and unless stocks can be replenished, supply will be inelastic in response to a change in demand. For example, if the raw materials of producing papers: tree are running out of stock, the price of papers will increase and soon the quantity supplied will also increase.

Another determinant of price elasticity of supply is time period involved in the production process. Supply is more elastic, the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets for example, the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the overall production yield.

The determinants of price elasticity of supply will affect the value of price elasticity of supply. The value of price elasticity can be categorized to 5 type; inelastic supply, elastic supply, unitary elastic, perfectly inelastic supply and also perfectly elastic supply.

(Part B)

The price elasticity of demand (Ed) is use to measure the responsiveness of the quantity demanded of a commodity to changes in its price. The value of price elasticity of demand is almost always negative because the law of demand state that when the price of a good fall, the quantity demanded will increase and vice versa. The formula to calculate the price elasticity of demand (Ed) is as follow:-

The businesses will use this method in their total revenue test to decide on their pricing strategy.

When they estimate if they increase the price from RM 1 to RM 3, the quantity demanded falls from 60 unit to 45 unit, the found out that the price of elasticity is -(0.17). This shows that the demand of the good is inelastic. This is because the percentages change in quantity demanded is lesser than the percentages changes in price. In this situation, the supplier will increase the price of the good because if they increase the price, they will increase the total revenue that they will get before. The total revenue before and after they increase the price is RM 60 and RM 135.

The second situation is when they found out that the demand of the good is elastic. This happen when the percentage change in quantity demanded is more than percentages change is price. For example, when the price of the good increase from RM 2 to RM 3, the quantity demanded start to fall from 100 units to 40 units. The price elasticity of demand show that this good have the value of – (1.2). In this situation, supplier will not increase the price of the good because if they still decide to increase the price, the revenue they will get will decrease. The total revenue they get before and after they increase the price is RM 200 and RM 120.

The other situation is when they decide to increase the price from RM 1 to RM 2, the quantity demanded of the good falls from 100 units to 50 units; they will found out that the demand of this good is unitary elastic, which is – (1). In this situation, the supplier will either choose to increase or decrease the price, because it would not change the amount of the revenue get.

All the businesses will have this total revenue test before they decide to increase or decrease the price of the good in order to get the maximum profit and not having a loss.

QUESTION 3

(Part A)

Price (RM)

S1

S0

Supply is defined as the quantity of a product is willing and able to supply onto market at a particular price in a particular time period. The relationship between the price and quantity supplied, called the law of supply. The law of supply states that the higher the price of the product, the more the quantity supplied for the product.

Quantity (unit)

Supply of a product will increase when the cost of production decrease. For example the cost of producing the bread has fall because the price of flour; bread’s raw materials has fall. The supply of the bread will increase. This will due the supply curve shift rightwards.

The second reason for the supply of a product to increase is the price of its substitute falls. For example, the price of a laptop has falls, due to this situation; the supplier has decided to increase the supply of desktop instead of increase the supply of laptop. This will shift the supply curve of laptop to right.

The third reason for the supply of a product to increase is the improvement of the technology used. For example, the development of computers has enabled books to be published in a much less labor-intensive manner, resulting in substantial cost savings. Supplier is willing to produce more books at any given price than before. Improvements in technology will cause supply to increase. This is affecting the supply curve to shift rightwards.

In conclusion, the supply of a product increase will affect the supply curve to shift right and bring more profit to the supplier.

(Part B)

A market is any arrangement that enables buyers and sellers to do business with each other. Equilibrium is a situation in which opposing forces balance each other. Equilibrium in a market occurs when the prices balances the plans of buyers and sellers. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price. Governments have introduced price floor and price ceiling regulation.

D

S

Price (RM)

Price floors are minimum prices set by the government for certain goods and services that it believes are being sold under an unfair market with too low of a price and thus their producers deserve some assistance.

Price floor

Pe

Quantity (unit)

In this situation, supply of the good will increase in order to get more profit. If the supply of the goods increase but demand of the goods still remains the same, this will cause surplus to happen. This is because the quantity supply is more than quantity demanded; this is causing the resources to be waste. The example of a good that have price floor is rubber.

Price (RM)

D

Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them.

S

Pe

Price ceiling

Quantity (unit)

This regulation is benefit to the consumers because they can buy certain things that are cheaper than the price before. But this will bring the market to faced the problem; shortage. This is happen because the quantity demanded is higher than the quantity supplied. This regulation occur more on the daily use product, for example sugar, cooking oil and more.

Both the price floor and price ceiling have different advantage and disadvantages. But at last, it is better to follow the equilibrium price to avoid the waste of resources.

QUESTION 5

(Part A)

Demand is defined as the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. Each of us has an individual demand for particular goods and services and the level of demand at each market price reflects the value that consumers place on a product and their expected satisfaction gained from purchase and consumption.

Price of milk (RM)

D

The higher the price of the good is, the lower the quantity demand of the good is. This is due to the law of demand.

B

6

A

3

Quantity demanded of milk (unit)

10

20

When the price of the milk increase from RM 3 to RM 6, quantity demanded for milk decrease from 20 units to 10 units. Therefore, a movement upward along the demand curve; from A to B shows a decrease in quantity demanded of milk.

The decrease in demand means the price of the good remain the same but only others determinants will decrease the demand of the good.

Price of the bread (RM)

D1

D0

B

A

2

10

20

Quantity demanded for the bread (unit)

For example, if the price of it substitute, biscuit falls, the demand of bread will falls because the price of biscuit falls will increase its quantity demanded and decrease the demand of bread. This will shift the demand curve to left which is from line D0 to D1. This is one of the determinants of demand. The second determinant of demand which will decrease the demand is the price of it complementary good. For example, the price of peanut butter increase, it will decrease the demand of bread because the consumer will not buy bread instead of its complement; peanut butter’s price has increase. This will also shift the demand curve to left which is from line D0 to D1.

Decrease in demand will shift the demand curve to left and decrease in the quantity demand will only have the movement upwards along the demand curve.

(Part B)

The income elasticity of demand is to measures the responsiveness of the demand for a good to a change in the income of the people demanding the good. It is calculated as the ratio of the percentage change in demand to the percentage change in income. The formula to calculate the income elasticity of demand is as follow:-

The income elasticity of demand can be categorized into 3 degrees. The first degree is positive income elasticity of demand. In this case, positive income elasticity of demand can be dividing into 2 type which is income inelastic and income elastic. Income inelastic means that an increase in income will lead to a rise in demand. The value of income inelastic is less than 1 but positive. This usually called as normal good or necessary good. Income elastic means that an increase in income will lead to a larger rise in demand. The value of income elastic is more than 1. Only luxury goods are under this category.

The second degree is negative income elasticity of demand. When the calculation of income elasticity of demand gets a negative value, it means demand will falls when income rises. The good that fall on this category is interior good. For example the demand of cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties.

The third degree is a zero income elasticity of demand. This occurs when the income change but the quantity demanded still remains the same. The good is a necessity or sticky good. The example of sticky goods is rice, salt and toothpaste.

Different good falls onto different category of good. Different degree of income elasticity will affect the quantity demanded of the good.


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