Posted at 11.04.2018
a) Within an economy, there are three different types of market. They are simply free market, command economy, and mixed economy. However, the first two will be mainly described in this section. You can find both advantages and disadvantages in using those two. If a country's resources should be allocated on the basis of price mechanism, that is, resources are only dependant on their supply and demand for them and there will be no intervention of government. It really is, quite simply, called free market.
ADVANTAGES OF FREE MARKET
There are many advantages in a free market economy. To begin with, free market can make producers adapt to improve easily. In other words, companies can change what they produce when there's a demand for just one specific type. For instance, if one kind of steel is now popular for construction, we can start produce that kind of steel. There is no government restriction.
Thus, it encouraged rational self interest. It is because folks have freedom to do what they want, make what they need and sell what they want to a certain extent. Though it is not true that government completely stays out, people can do the majority of their business as they please.
Another major advantage is the fact, the free market provides lot of choices because of great variety of goods and services for the clients. This is really because of massive increase in efficiency and productivity.
Furthermore, the next advantage is the fact, the presence of competition. Competition is healthy as it encourages research and development. Invention and innovation are created possible with science and technology. Together with the existence of such elements, economical growth may be accomplished. Producers could keep on enhancing their techniques of production to be able to contend with other firms.
DISADVANTAGES OF FREE MARKET
In contrast, there are also drawbacks of the free market economy. In reality, there are no perfect free market economies. The major disadvantage is the fact that to be most effective it requires some ideal environmental conditions like full, free and instantaneous option of all relevant information to all buyers and sellers. It also requires complete freedom to manufactures in one industry to some other. Perfect conditions like these are possible only in theory.
Another major limitation of free market is which it cannot decrease the difference between the haves and also have not since everyone can purchase or sell freely according to their will. Thus, because of the imperfection in the machine, the free market system just increases the disparities between people.
Another drawback of free market system is the existence of unemployment. As the economy is governed by the "invisible hands", there is usually a disparity between demand and offer. If supply of labour is higher than the demand for workers, unemployment will occur. This aspect clearly explains the high unemployment rate generally in most capitalist states.
b) In case a country's resources are allocated on the basis of planning and predicting, it is called planned economy or command economy. It has also been defined in various ways. Government will be engaged and use resources such as, land, labour and capital to market the economy of the state of hawaii. Alec Nove (1987) defined it as an monetary system in which the central government makes all decisions on the production and consumption of goods and services. However, all of them are the same.
ADVANTAGES OF PLANNED ECONOMY
Concerning the benefits of planned economy, the most crucial one is stability. Since the economy was already planned, long-term investments can be made without worrying about when the economy will decline (market downturn), or losing confidence. Every investment will need stability. It really is specifically important where returns are risky and diffuse. Thus, by having stability, investments can be made more safely.
The next advantage is that planned economy usually designed to serve collectively rather than individually. It is mainly used for systems such as rewards and wages which should be distributed based on the value that their state ascribes to the service performed.
Another important advantage is the fact, planned economy can avoid major pitfalls of free market, that was among the most crucial factors for socialist economists of the first 20th Century. The planned economy is not subjected by business cycles, it do not experience crisis such as overproduction, since it is carefully planned for both present and future.
In contrast to the free market economy, in a planned economy, theoretically, there is no difference between the rich and poor. It is also considered as a classless society. Quite simply, there is no difference between the haves and the have never. However, in practice, there continues to be a gap between the two groups although the gap is not as apparent just as a capitalist system.
DISADVANTAGES OF PLANNED ECONOMY
In contrast, there's also some major disadvantages in planned economy. There can be both surplus and shortage in resource distribution. From the modern perspective, shortage means an incorrect matching between supply and demand, quite simply, the planners must have misjudged the demand for the merchandise, the equilibrium price, or both. In a free market economy, such imbalance would be corrected within a year, can last longer even for decades. In addition, gleam problem of surplus. Surplus in resource distribution means that there is a waste of labour and materials you can use for both production and society.
Another major disadvantage is having less incentive for innovation. It is argued that planned economy is less inclined to promote innovation than the free market. Insufficient innovation will results in low morale degree of the workers. In case the workers are not motivated enough, they may well not continue steadily to work and a company's productivity will also decrease.
The final disadvantage is the infringement on individual freedoms. It is argued that the planned economy takes a state which intervenes highly in people's personal lives. For instance, if goods are allocated by the state of hawaii, people will not be able to proceed to another location without state permission because they would not be able to acquire food or housing in the new location, as the required resources were not preplanned.
Section - 2 (Task - 2)
The demand curve, D, shows the quantity demanded by the customers. Quantity demanded can be an amount of quantity in which the consumers need it their required product. The supply curve, S, shows the quantity supplied by the clients, which is the total amount supplied to the marketplace by the producers. Equilibrium price is the purchase price at which the number for the demanded equals the quantity supplied. The figure shows the way the equilibrium price works. The idea E indicates the equilibrium price. As stated, this happens when the quantity demand equals quantity supply. When E is established, equilibrium price, P1 and equilibrium quantity, Q1 can be easily determined. When the steel price is increased, from P1 to P2, the quantity supplied becomes excess as shown in the diagram. In contrast, if the price of steel is decreased, from P1 to P3, the quantity demanded becomes excess. Those two trends are clearly shown in the diagram.
b) In general, there are a lot of factors that affect the demand and supply for steel. For the demand, there are three main factors. They will be the price of related goods, consumer incomes and preferences or tastes. For the supply, technology, input costs and government regulation are the three main factors.
FACTORS AFFECTING THE DEMAND OF STEEL
The first one is the price tag on related goods, the price of substitutes. It could be assumed that aluminium is a substitute for steel since it gets the same characteristics as steel and can be used rather than steel. Therefore it is possible that if the price tag on aluminium falls, the quantity demanded for steel will certainly reduce. In contrast, if the aluminium price increases, the number demanded for steel will increase.
If the consumers get higher incomes, chances are they are willing to boost their living standards. After they are prepared to do that, they'll use more products, for example, completely new cell phones which are made with stainless steel. If the general public is buying such products, the producers will produce more and the demand of steel increase.
Another factor is the preferences. It is because there are various kinds of steel and many uses for steel. Although they are being used in home appliances such as kitchen ware, steel is mainly found in construction sites. Even whether it's narrowed down to construction sites, different types of steel are being used for different buildings. Also, there may be occasions where certain types of steel and designs have become popular. If that occurs, that one steel type will get higher demand than other types.
FACTORS AFFECTING THE WAY TO OBTAIN STEEL
Concerning the factors affecting the supply of steel, all three (technology, input costs, and government regulation) mention above are included. Every goods must be made with their own methods and since steel can't be made in simple way, (it needs machines and tools) so, technology plays a vital role. If one company uses better and required machines and tools to create steel than other company, that one can produce more.
Input costs must also be considered. Associated with simple. Steel requires certain amount of iron and carbon, and various types of steel require different amount of components. Therefore, if a kind of steel, which requires more amounts of components than others, is going to be produced, the production cost would be very high and that will affect the supply.
Government policies can both increase and decrease the quantity supplied of steel. Some forms of policies are production quotas and production subsidies. Production quota can be applied to individual worker, industry or country. Quota may be used to encourage production or limit it to control the way to obtain goods. Also, since quotas raise the domestic price of the restricted goods, in the same way tariffs, it impacts the number supplied. If government provides direct production subsidies, by cash payments for production of steel, it is to encourage the introduction of steel industry.
Section - 3 (Task - 3)
a) The short run is the time in which the firm cannot fully adapt to an alteration in conditions. Inside the short run, the firm has some fixed factors of production. A fixed factor of production can be an input that can't be varied. In short-run, at least one factor of production is fixed. As stated above, there are three main factors affecting the way to obtain steel. Obviously, input costs are variable and because the use of technology can't be varied, it could be considered as a set factor of production. Furthermore, because of the fact that the technology is the most crucial factor, the way to obtain steel largely depends upon it. If one company had produced and still continuing to manufacture certain kind of steel, for example high-speed steel, with the same method of production (technology), the supply of steel will be fixed in the short run.
The diagram shows supply curve for steel in short-run. Because it is within inelastic condition, change in price, from P1 to P2, is more than change in quantity supplied, from Q1 to Q2 and shown with a steep supply curve in the diagram.
Figure 3. 2 illustrates the supply of steel in long-run. Being within an elastic condition the supply curve is flatter than the inelastic one. In this problem, the change in cost is less than the change in quantity supplied.
There are different types of steel that can be produced. Different types of steel require different methods and time. For example, steel that is manufactured for building sites would take days to complete while those for kitchen appliances would take for the most part one day. The distance of production process is one of the factors affecting the elasticity of supply. Elasticity of supply will change if resources in production can be easily transferred from one good to some other, for example, from carbon steel to stainless, although stainless costs a little more than carbon steel. Furthermore, you will see barriers to entry. Any types of barriers will prevent supply from adjusting to any price changes. Therefore, it will consequently leads to changing the elasticity of supply.
c) The aim of the purchase price ceiling is to lessen the price tag on something (steel). However, there are still some other ways to lower the price tag on steel. To begin with, is having a rational policy. Its purpose is to provide fixed amount of commodity to each person before shortages. It is really because of shortage in supply. Consequently, the situation of supply shortage will lead to the reduction in price. Secondly, is by pegging the price. When the purchase price is pegged (fixed), goods can't be sold above or below the fixed price. Price is pegged and then decrease the original price of the good. The past method is to raise the import. By increasing the imported goods from other countries, it's possible that those goods are better in quality and worth more than the neighborhood goods. If so, the purchase price for local products will be reduced.
Section - 4 (Task - 4)
a) A price ceiling is a government-imposed limit how high a price can be charged on something. Price ceilings are often intended to protect consumers from certain conditions that could make necessities unattainable. However, price ceiling can also cause problems if it is used for an extended period of time without manipulated rationing.
The price ceiling creates a shortage of supply relative to demand by reducing foods and goods' prices below their equilibrium level. The point E indicates the free market equilibrium, which occurs when the number supplied meets quantity demanded. When equilibrium is founded, P1, free market price at equilibrium and Q1, free market equilibrium quantity can be determined as shown in the diagram. The line AB is the excess demand, which was resulted when price ceiling at P2, is established. In addition, it reduces quantity supplied from Q1 to Q2. Although the price ceiling succeeds in holding down the purchase price, it causes excess demand. Above diagram may also be used as a cost ceiling for steel. P1, and Q1, will be the equilibrium price and equilibrium quantity respectively for the steel. According to the theory of the purchase price ceiling, when P1 is reduced to P2, the number demanded for the steel increase and the contrary for the quantity supplied. When the purchase price is reduced, the amount of steel supplied Q1 moves to Q2, thereby reducing the quantity supplied. It is because the steel suppliers won't supply up to before as the price lowered down.
The above diagram shows the effect of price ceiling on the demand for steel. The equilibrium price, P1, and the equilibrium quantity, Q1 are founded once the quantity demanded for steel equals quantity supplied, leading to equilibrium point, E, being established. Because the purpose of the price ceiling is to lessen the price tag on the steel, when P1 is reduced to P2, the quantity demanded increased from Q1 to Q2. This means that if the price of steel is reduced, the quantity demanded for steel will be increased, and the space between A and B becomes excess demand, as shown in the figure. Associated with simple. For the supply, for each goods, the producers or suppliers will supply less and less as the price reduces since that reduce their income and profit. For demand, steel users, for example, construction sites and car manufacturers will buy more in order to be in a position to build more and produce more, leading to quantity demanded being excess.
Section - 5 (Task - 5)
a) The aim of a price ceiling is to reduce the purchase price for consumers. When Politburo introduces price ceiling on steel, it is clear that the price of steel will be reduced. Since Politburo is intending to distribute the wealth to ordinary Russians, it is probable that even some poor people who require steel for his or her own reason will afford to buy. Though it is an advantage to the customers, it isn't favourable to the companies that are producing steel. For the reason that, legally, they have to decrease the price to provide in the free market and consequently, that will lower their income and profit. The companies may still supply somewhat, however when some conditions, such as when the production costs become higher than the prices, arise, they could stop producing steel and shut-down cases might occur.
b) When Politburo introduces price ceiling, although it reduces price for customers, some negatives, that are shown below, may occur.
Legally, it holds true that price ceiling reduce the price for customers. When price ceiling is introduced, the most evident thing that the supplier is likely to do is to lessen the input costs. Clearly, when input costs are lowered, the grade of steel may also be lowered. The period, before the price ceiling is introduced, steel producing companies would use better raw materials (iron and carbon) than the time when the price ceiling is introduced. Therefore, in the latter period, the merchandise (steel) becomes lowered in quality.
Illegally, price ceiling increases the price. When customers cannot get yourself a good(s) they need, since price ceiling reduced the quantity supplied, they may try the black market to get what they want. Those that got lucky or good management get more profit by selling the goods illegally in black market. The price in the black market is greater than the free market price since the quantity supplied is significantly less than that on free market where more sellers could afford to market the product.
When there's a shortage in supply, because of price ceiling, the steel suppliers will discriminate in who's able to obtain them. It is possible that they can give favour to rich people. Because of this, only rich people will get chance to use steel because of their needs. However, this only occurs when there is a shortage in supply.
Since the purpose of the purchase price ceiling is to reduce the price of steel for consumers, it also decreases the income for the suppliers. In the event the income is lowered, the suppliers won't supply steel as much as before and thus, the quantity supplied decreases. Furthermore, some suppliers may stop producing steel and turn to other industry, thereby significantly reducing the number supplied in market. Because of this, it could be said that the price ceiling, introduced by Politburo is making the problem worse.
Figure 5. 2
Figure 5. 3
Even though price ceiling has advantages in some instances, there are some reasons why the price ceiling, imposed by the Politburo is making the problem worse. Since price ceiling reduces price for customers, legally, the steel producing companies gain less profit as shown in the figure and some companies might shut-down. Eventually, some companies that may not shut-down will turn their interests to black market. It really is described in the first diagram in this section which is resulted in the steel producers selling in black market in order to obtain additional profit. It is because the purchase price in black market is greater than that in free market as less quantity is supplied in black market. Thus, it can be said that price ceiling, which is introduced by Politburo is making the situation worse.
Section - 6 (Task - 6)
Alec Nove (1987), "planned economy, " THE BRAND NEW Palgrave: A Dictionary of Economics, v. 3, pp. 879-80.
Begg, D. (2003), Economics, Seventh Edition, Mcgraw-Hill, pp. 26-33
Ali, H. (1990), Comprehensive Economics Guide, Oxford University Press.
Library of Economics
http://www. econlib. org/ (Accessed on November 1, 2009)
Economics at About. com - Your portal to the world of economics
http://economics. about. com/ (Accessed on November 1, 2009)
Planned economy - Wikipedia, the free encyclopedia
http://en. wikipedia. org/wiki/Planned_economy (Accessed on November 1, 2009)
Free market - Wikipedia, the free encyclopedia
http://en. wikipedia. org/wiki/Free_market (Accessed on November 1, 2009)
Price ceiling - Wikipedia, the free encyclopedia
http://en. wikipedia. org/wiki/Price_ceiling (Accessed on November 5, 2009)