One of the economy systems is market system. In that system, private individuals and firms own most of the property resources which are land and capital. Individuals and firms are free to make economic decisions that benefit them. Consumers seek to pay for the good and service in the best value. Besides that, the objective of firms is to achieve the maximum profit. Then, workers seek to maximize their wages according to the working in particular job.
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Individuals, firms, and workers are free to make the economic choices. For example, consumers can decide the type and the amount of the goods that they want to buy. Firms can decide the type, production method and amount of the goods that they want to produce according to their ability. Worker can choose their jobs which they are qualified by themselves.
Hence, the rich can satisfy their desires for a good or service because they are able to pay for it. On the other hand, the poor disable to pay for the goods and services they want so they can’t maximize their satisfaction. As a result, the people who are able to pay for it can consume the good. Therefore, a market system cope with the economy scarcity by the ability of a person to pay for the goods and services he wants.
Besides market system, command economy also can cope with economic scarcity. In this system, government is an economics decision maker. Government makes decision through a central economics plan. Most of the property resources are owned by the government.
Individuals and firms cannot make economic decision freely. The government controls the price and quantity supplied of the goods. Government plans the output, production material and the technique used of each firms. It also plans the worker in each industry. Individuals are not given choice to choose their jobs.
There is no competition in command economy. Consumers need not to compete to buy a good that is valuable because government distribute all the goods to the people in accordance with needs. Besides that, firms also need not to compete to produce a purchase that can maximize the profit. It is because government has planned the output of each firm. Government distributes goods to the people according to its judgment. For example, government gives more to those who contribute more and work harder. This may encourage people to work harder too.
In this system, market prices are used to make the decision to allocate the resources that owned by government and queue the scarce resources. The government distributes the goods and services to the people and allocate the income of the people. Then, it gives the choice to them to spend the money. The objective of doing this is to handle the pattern of expenditure by setting an appropriate price. High price is set to discourage consumption while encourage consumption by setting low prices.
Therefore, a command system copes with economic scarcity by the judgment of government to take care of social welfare.
Question 3
Part A
Supply means that producers are willing and able to produce the amount of good at each of a series of possible prices during a specific period. There are several reasons cause the supply of a product to increase.
Cost of resources is one of the determinants of supply. It causes supply of the product to increase when the cost of resources rises and vice versa. The lower price of resources will reduce the cost of production. By the time, more profit will be made at the price. Hence, producers will increase the production to maximize the profit. For example, the decrease in the price of rubber will increase the supply of tires.
Prices of other goods can affect the increase in supply of a product too. When a firm wants to produce a particular product, it can use their plant and method to produce alternatives goods. For example, laptop and desktop are the goods in joint supply. When the price of laptop rises, firms are more interested in producing laptop because it can earn more profit. At the same time, desktop becomes unattractive to the firms because it cannot maximize their profit.
Another reason of increase in supply of a product is the number of sellers. When the number of sellers becomes larger, market supply will become greater. If firms leave an industry, the market supply will decrease and the supply curve will shift leftward.
In conclusion, decrease in cost of production of a good, increase in the number of sellers and decrease in the price of a good in joint supply with the good that produced by the firm are the reasons of increase in supply of a product.
Part B
The government sets price floors on goods to avoid the price of them from falling below a certain level. However, economists say that the price floors and ceiling stifle the rationing function of prices and distort resource allocation.
Economists say it because price floor is above the equilibrium price that stifle the rationing function of prices. Rationing function of prices is the ability of the competitive force to establish the consistent price of the good in selling and buying decision. If the market equilibrium price of a burger is RM2 and there is no shortage and surplus in the market, the consumers who are able and willing to pay RM2 for a burger will obtain it. However, the buyers who cannot or will not pay for it will fail to obtain it. On the other hand, sellers are able and willing to sell burger in RM2 will sell it and the sellers who are disable or not willing to sell a burger for RM2 will not sell it.
The objective of setting the price floor is to protect the producer’s income. The setting of price floor can ensure the producers in not making loss in sales. Besides that, it also motivates the producers to increase in the production in goods. Hence, the supply of the goods will not keep decreasing and out of control. In resources allocation, consumers suppose to pay less in buying the product but the setting of price floor raise the price of the product. For example, the price of mask is falling to RM0.05 each because of the surplus. Then, government sets a price floor of RM0.10 for each mask. By the time, consumers need to buy it at the price of RM0.10 and they suppose to buy it at the price of RM0.50. It has distorted the resource allocation.
Government sets price ceiling to prevent the price of good from rising above a certain level. The objectives of setting the price ceiling are to protect the benefit of consumers. The setting of price floor can ensure the consumers to be able to buy a particular product especially for those on low incomes. Besides that, it also encourages the consumers to buy the product. However, it is not fair to the suppliers because they suppose to earn more from sales. For example, the price of volleyball is RM100 because of the increase in demand. Then, government sets price ceiling of RM80 for each volleyball. Therefore, the suppliers sell the volleyball at the price of RM80 and they suppose to gain RM100 from each of the volleyball. This has distorted the resource allocation too.
Question 5
Part A
There are several differences between a decrease in demand and decrease in quantity demanded.
Quantity demanded is the amount of a good that a buyer is able and willing to buy it at a certain price over a time period. Decrease in quantity demanded is caused by the rise in price of a product. For example, when the price of a mobile phone rises from RM800 to RM1000, the quantity demanded will fall from 1000 units to 500 units. However, decrease in demand is caused by the determinants of demand, rather than the price of the good. The determinants of good affect the decrease in demand such as tastes, number of buyers, income of household, the price of substitute and complement good and consumer expectation. For instance, tea and coffee are substitute goods. When the price of tea falls from RM2 to RM1, the demand of coffee will decrease. It is because the price of tea and the demand of coffee are positive relationship. Consumers tend to buy more tea when its price falls and so the demand of coffee will decrease.
PBesides that, decrease in quantity demanded causes the demand curve to move upward.
A
P1
B
P2
D0
0
Q2
Q1111
Q
Figure 1
Figure 2
P
Q
D0
P0
0
Q1
Q0
D1Figure 1 shows a decrease in quantity demanded of apple. According to the figure 1, the price of apple falls from P1 to P2, there is a movement downward from point A to point B along the demand curve D0. Nevertheless, the decrease in demand causes the demand curve to shifts leftward.
Figure 2 showing a decrease in demand of potatoes. Potato is a normal good. The decrease in income of consumers causes the decrease in demand of potatoes. According to the figure 2, when the income of consumers decreases, the demand of potatoes decreases from Q0 to Q1. Therefore, the demand curve shifts leftward from D0 to D1.
Part B
Percentage change in quantity demandedIncome elasticity of demand is used to measure the responsiveness of demand to a change in consumer’s income by buying more or less of a good. The coefficient of income elasticity of demand, Ed can calculate from this formula:
Percentage change in income
Ed =
There are three degrees of income elasticity of demand which are positive, negative and exactly zero.
If the income elasticity coefficient, Ed is greater than 1, that means it is elastic. The percentage change in quantity demanded is greater than percentage change in income. The goods can be normal goods or superior goods. For example, shoe is a normal good. When the income of consumer increases by 10%, the quantity demanded of shoes will increase by 20%. The income elasticity of demand of shoes is 2, > 0.
If the income elasticity coefficient, Ed is less than 0, that means it is inelastic. The percentage change in quantity demanded is less than percentage change in income. The good is recognized as an inferior good. For instance, used clothing is an inferior good. If the income of consumer rises by 5%, then the quantity demanded of used clothing will decrease by 10%. Hence, the income elasticity of demand of used clothing is -2, < 0.
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If the income elasticity coefficient, Ed is equal to zero, meaning that the degree is exactly zero. The percentage change in income will not affect the percentage change in quantity demanded. Such goods are called necessities. For example, rice is a necessity of daily life. If consumer’s income decreases, the quantity demanded of rice will not increase and remain the same. Therefore, the income elasticity of demand is equal to zero.
Question 6
Part A
Diagram 3
80
50
Q0
Consumer surplus
con
Equilibrium price
0
DConsumer surplus is the benefit received by consumers in market. It is the difference between the maximum price that consumers are willing to pay and the actual price of the good. Consumer surplus appears when a consumer pay the equilibrium price that less than the price he would be willing to pay to obtain the product.
P (RM)
Q (unit)
Diagram 3 shows the demand curve of bag. For example, Lily is willing to pay a maximum of RM80 to obtain a bag. The equilibrium price of the bag is RM50. So, Lily receives a consumer surplus of RM30 (RM80-RM50). .The relationship between consumer surplus and price is negative. Lower prices increase the consumer surplus but higher prices reduce it.
Producer surplus is the benefit received by the producers in markets. It is the difference between the minimum acceptable price and the actual price that producers receive. Producer surplus appears when the minimum acceptable price of producers higher than the equilibrium price. Producer surplus and price are positively related. Lower prices decrease the producer surplus but higher prices increase it.
P (RM)
Diagram 4
Equilibrium price
Q0
Producer surplus
pro
S
0
2000
Q (unit)
Diagram 4 shows the supply curve of computer. For instance, Peter is the seller of computer in market. His minimum acceptable price is RM1500. As the equilibrium price of computer in market is RM2000, Peter received a producer surplus of RM500 (RM2000-RM500).
Good XPart B
20
F
B
A
C
15
Diagram 5
2
5
10
E
0
5
7
8
D
Good Y Diagram 5 shows the production possibilities frontier. Assume that there are full employment, fixed resources, fixed technology and two goods are produced in the certain period.
Point A, B, C and D mean that the resources of production are used efficiently. Point E means that the economy is wasting the resources without produce the greatest output possible. Point F cannot be achieved because the technology and resources are not able to achieve it.
Scarcity is a situation when there are limited resources that cannot produce as many products as they want to produce and satisfy the unlimited wants of people. The concept is shown by diagram 4. The area inside the curve shows the resources are limited. If firms want to increase the production in good X from 15 units to 20 units, they must reduce the production of good X from 5 to 2 at the same time. It is because the resources are limited.
Choice is an economic concept for people to choose a good in order to maximize their satisfaction because of the scarcity. According to the diagram 4, firms will decide to increase or decrease in production of good X or good Y that can maximize the profit. For example, if the increase in production in good X can raise their profit, firms will tend to do it.
Opportunity cost occurs because of the choices that people made. It is the second best choice that has been scarifying in making choice. For example, firms have choices of producing 10 units good X and 7 units good Y or 15 units goods X and 5 units good Y. If firms make the first choice, the opportunity cost will be 2 units good Y. On the other hand, the opportunity cost will be 5 units good X if firms make the second choice.
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