Unit 2: Allocation of Resources - done

Question 1

What are the disadvantages of market economic system?

Answer 1

• some worthwhile goods and service may not be produced because its not profitable enough.
• firms will only supply products to consumers who are able to pay for them
• resources will only be employed if its profitable enough
• harmful goods may be produced if they are profitable enough
• firms may disregard the welfare of people, environment and animals.

Question 2

What are the advantages of market economic system?

Answer 2

-There are very few tax regulations
- firms may use their profit as a motivation factor to produce more products and come up with more efficient production methods
- firms will respond quickly to changes in consumer wants and spending patterns.
- a wide variety of goods and services will be produced.

Question 3

What is the ways a government can intervene in a market?

Answer 3

-> As a regulator: setting maximum price for a product that firms cannot exceed. or setting a minimum standard for a service that a firm provides. or ban the production of harmful goods
-> As a consumer: using its significant prices to force firms to increase the supply of goods and services at reduced prices.
-> As a producer: directly employing factors of production to produce goods and services that private firms don’t produce or do produce at high prices that only a few can afford.

Question 4

What is the difference of individual and market demand

Answer 4

Individual demand- demand of just one consumer
Market demand-a total demand for a product that all consumers are willing and able to buy.

Question 5

What is supply, and quantity supply and market supply curve(definitions)?

Answer 5

Supply refers to the amount of good and service firms or producers are willing to make and sell at different prices. Quantity supply refers to the amount of good or service a producer will be willing to make and sell to a consumer in the market. Market supply curve is the sum of all the individual supply curves of producers competing to supply a product.

Question 6

What is demand, and quantity demanded and market demand curve(definitions)?

Answer 6

Demand is the want of willingness of consumer to buy a good or service. The amount of good or service a consumer is willing and able to buy. Market demand curve- shows the relationship between the quantity demand be consumers at each period and the price of that product.

Question 7

What are the movements along the curve for demand

Answer 7

Extension in the demand curve: As price falls, quantity demand for the product rises, and curve extends.
Contraction in the demand curve: As price increases, quantity demand for the product decreases, and curve contracts.

Question 8

What are the movements along the curve for supply

Answer 8

Extension in the supply curve: As the price for a product rises, quantity supplied will increase, causing the curve to extend.
Contraction in the supply curve: As price falls, quantity demand for the product decreases, and curve contracts.

Question 9

What are the shifts in demand?

Answer 9

An increase in demand- consumers now demand more of the product at every price then they did before. Market curve shifts to the right.
A decrease in demand- consumers now demand less of a product at every price then they did before. Market curve shits to the left.

Question 10

What are the shifts in supply?

Answer 10

An increase in supply- producers are willing and able to supply more of the product at every price then they did before. Market curve shifts to the right.
A decrease in demand- producer are less willing to supply more of a product at every price then they did before. Market curve shits to the left.

Question 11

What increases the demand of product 6 marks - knowledge?

Answer 11

• an increase in consumers income
• a reduction in taxes on income
• an increase in the price of substitutes
• a fall in the price of complementary goods
• a rise in population
• consumers habits, fashion, and tastes changes in the favor of the product
• an increase in advertising.

Question 12

What increases the supply of product?

Answer 12

• other products becoming less profitable
• fall in the price for factors of production
• technological advancements
• business optimism increases
• govt paying more subsides
• increase in resources
• other factors

Question 13

What decreases the demand of a product?

Answer 13

• a decrease in consumers income
• an increase in taxes on income
• a decrease in the price of substitutes
• an increase in the price of complementary goods
• a fall in population
• consumers habits, fashion, and tastes changes in the favor of other product
• a decrease in advertising.

Question 14

What decreases the supply of a product?

Answer 14

• other goods and services becoming more profitable
• a rise in the costs for factors of production
• technological failures
• less resources
• less business optimism
• government decreasing the amount of subsides provided
• other factors like wars and natural disasters

Question 15

What is a complementary and substitute?

Answer 15

A complementary good- is a good that another product requires as an accessory.
A substitute; a product that replaces the want for a product.

Question 16

What is the definition of PED, and what are two main components of it?

Answer 16

PED is the price elacitisty of demand- it refers to the responsivness of consumer demand with changes in price of a good or service. A product is said to be price elastic, when there are big changes in the quantity demanded, with a small change in price. A product is said to be price inelastic, when there are minor changes in the quantity demanded, with a small change in price.

Question 17

What is the definition of PES and how can we calculate it , and what are two main components of it?

Answer 17

• PES(Price elacticity of supply)- refers to the responivness of quanitity supplied, with a change in price of a product.
• PES= %change in quantity supplied/ % change in price
• % change in quantity supplied= change in quantity/original quantity x100
• %change in price= change in price/original price x100
• % change in price>%change in quantity supplied. PED<1 (inelastic)
• % change in price<%change in quantity supplied. PED>1 (elastic)

Question 18

What are the determinants of PED?

Answer 18

• number of competitors available
• availability of substitutes
• cost of switching to alternative good of service
• proportion of income spent
• if the product is a necessity

Question 19

What are the determinants of PES? Why will PES be inelastic in short run but elastic in long run?

Answer 19

• Availability of finished goods
• Availability of raw materials
• Time required to scale up production
• Mobility & availability of factors of production
• Production capacity
  Because production will take time and also the procurement of raw materials.

Question 20

What is the significance of PED?

Answer 20

Consumer- higher competitors(more variety), knowledge of substitutes, price raises, and market changes
Firms- Price and product and production capacity determinants
Govt- can enforce indirect tax on products

Question 21

What is the significance of PES

Answer 21

Consumers- Spending a higher proportion of income on products with inelastic supply
Producers- training workers to gain more skill to be more mobile, getting additional storage spaces to store stocks of their products, employing the latest production equipment (capital equipment)
Government- provide subsidies to products with an inelastic supply, reduce taxes of products with an inelastic supply, provide financial support for small firms.

Question 22

How can we calculate PED?

Answer 22

PED= %change in quantity demanded/ % change in price
% change in quantity demanded= change in quantity/original quantity x100
%change in price= change in price/original price x100

Question 23

What will be in the suppliers best interest if a product is price elastic or price inelastic? (PED)

Answer 23

if it is price elastic meaning if its greater than 1 a supplier gain more by decreasing their prices they gain more. If its price inelastic<1 if a consumer increases their prices they will gain more revenue.

Question 24

What is the definition of microeconomics and macroeconomics?

Answer 24

Microeconomics: Study of individual markets and sections of the economy rather than the economy as a whole. Macroeconomics: Study of economic activity and decision making in the entire economy.

Question 25

What are the characteristics and study of microeconomics? 10

Answer 25

• single market
• price of goods and services
• individual market demand/ market demand
• individual firms. market supply
• government interventions in the market
• reason of difference in workers wages
• examines the choices of individuals, households and firms
• examines the factors that influence these choices
• examines how these choices affect the demand and supply of a good and service in a market
• examines government intervention in consumption and production

Question 26

Economic decisions need to be made to answer three important questions. What are these three questions?

Answer 26

What to produce
How to produce
For whom to produce

Question 27

How are these three question in price mechanism answered in market, mixed and planned systems.

Answer 27

Market-
Demand and Supply(price mechanism)- What (decision makers)
Most efficient and profitable way- How
For those who can afford it- Whom
Mixed-
Demand, Supply and Government- What (decision makers)
Efficiently but a focus on welfare- How
For those who can afford it, but provision is provided- Whom
Planned-
Government- What (decision makers)
Ensures everyone has a job- How
Everyone- Whom

Question 28

What is a market economic system and the price mechanism?

Answer 28

The market system work to efficently reallocate purely by demand and supply(price mechanism). There is no govrnment intervention. Price mechanism is the interaction between demand and supply in a free market. The interaction determines prices which are means by which scare resources are reallocated.

Question 29

What are the functions of price mechanism?

Answer 29

The function of price mechanism is to allocate resources. When resources becomes scarce, price rises. When resources are in surplus, price decreases. Provides producers and consumers where resources are required(in market when price increases) and places where they aren’t (in markets when price decreases). It also provides a way for producers to know where they can maximize their profits, by taking their resources from a less profitable market to a more profitable market

Question 30

What is equilibrium, and how is equilibrium achieved?

Answer 30

Refers to the price at which both parties, producers and consumers are willing to exchange. Buyers a sellers meet to exchange at an agreed price. Buyers agree by purchasing the product. If they do not then they don’t buy the product, exercising their consumer sovereignty. Based on this interaction suppliers will adjust the price to an equilibrium price and quantity that both parties are satisfied with. Sellers will be content with the rate/quantity of sales. While buyers will be content they are paying for a product, for the benefits the product brings. Equilibrium in a market - supply. At this point price is known as the market clearing price. Suppliers are clearing out their products at an acceptable rate, to maintain market equilibrium.

Question 31

What is disequilibrium- excess demand? Give the situation on how a market reaches equilibrium, when its disequilibrium is caused by low prices.

Answer 31

Disequilibrium- excess demand occurs when demand is greater than the supply. Can happen because prices is to low, or demand is so high, that suppliers can’t provide enough quantity.
Market is in disequilibrium. Suppliers are frustrated because products are getting bought at a price that is to low. And some buyers are unsatisfied as they may not be able to purchase the product. Sellers realize they can increase prices to increase revenue. Sellers increase prices: contraction in QD as buyers may not want to purchase the product at a high price and extension in QS as suppliers will want to supply more due to high prices. Eventually market will clear excess demand and will reach equilibrium.

Question 32

What is disequilibrium- excess supply? Give the situation on how a market reaches equilibrium, when its disequilibrium is caused by high prices.

Answer 32

Disequilibrium- excess supply occurs when supply is greater then demand. Can happen because prices are high or demand is low.
Market is in disequilibrium. Suppliers are frustrated that products aren’t getting bought at obviously high prices. Buyers are frustrated they can’t buy products due to their unwillingness to buy products at that high prices. Sellers realize they can decrease prices to generate prices: contraction in QS as suppliers aren’t willing to supply at low prices. Extension in QD as buyers are willing to buy at lower prices. Therefore excess supply is cleared off and market will reach equilibrium.

Question 33

What are the characteristics of market system

Answer 33

• property ownership: individuals are free to purchase factors of production
• freedom of choice: firms can produce what, who, and how they want to produce goods/services, consumers can choose what good/service benefits them the most and buy it, individual are free to start their own firms.
• self interest: entrepreneurs maximize profit, workers maximize wages, consumers maximize their well being.
• limited government intervention: in a pure market system there is no govt intervention. But that doesn’t exist so there is low govt intervention, in the form of taxes, provision of defense, healthcare, education.
• price mechanism: changes in price allocate resources. Rise in price means shortage of resources. Fall in price means surplus in resource.

Question 34

What is mixed economic system? Mention characteristics

Answer 34

It is a mixture of a planned system and a market system. Individuals, firms and governmetn can purchase factors of production and make goods/services. Technically every country is a mixed economic system, but it depends on the government intervention to say at what degree they are at. Characteristic:-
- Co survival of public and private products
- economic planning
- safeguarding consumer rights
- protecting labor rights

Question 35

Why will countries require government intervention

Answer 35

• provision of defense, education, healthcare, and increase affordability
• prevent exploitation
• to correct market failure- many individuals or firms may not want to self correct their misallocation of resources- so the government has to do that- they achieve this by choosing what a market consumes and produces
• support poorer households by income redistribution
• provision of public and merit goods, and banning demerit goods
• promote equity
• support firms, to increase competition

Question 36

How will governments intervene?

Answer 36

• Privatization: Quality- consumption- revenue- contribute to GDP- more money for govt to spend on infrastructure
• Nationalization: prevent exploitation
• Subsides, indirect taxes, max and min price: increase affordability, increase the provision of merit and public goods, avoid market failure
• State provision of public goods.

Question 37

What are the disadvantages of government intervention?

Answer 37

• Govt intervention might raise some conflicts
• Govt interventions take a long time to agree on, and takes an even longer time to impact something
• Prices may encourage black market and smuggling
• Taxes, subsidies and provision of other policies may distort price signals and incentives
• regulation may increase production cost and prices
• public goods may be inefficient and provide a poor quality of goods and services.

Question 38

What is market failure and why does it occur?

Answer 38

Inefficeint distribution of goods and services in a market.
May be caused by:
- Under provision of merit and public goods, so under allocated resources
- Over provision of demerit goods, so over allocated resources
- Environmental damage may occur
- Sometimes market lacks equity
- abuse of monoply power

Question 39

What is Social Cost, Private Cost and External Cost

Answer 39

Social Cost= Private Cost + External Cost
Private Cost-> Cost borne to those who are directly involved in the production or consumption of a product.
External Cost-> Consumption of a demerit good by 3rd party.

Question 40

What is Social Benefit, Private Benefit and External Benefit

Answer 40

Social Benefit= Private Benefit + External Benefit
Private Benefit: Profit, use of other product
External Benefit: The benefit on firms and consumers that is gained due to an economical transaction that doesn’t involve them.