StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Demand & Supply Analysis and Choice of Economic System - Essay Example

Cite this document
Summary
The paper sought to explain why in practice most countries adopted some form of the mixed economy in allocating resources even though the free market economy functions automatically. A mixed economy is an economic system in which many private companies and a strong public sector coexist…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.8% of users find it useful
Demand & Supply Analysis and Choice of Economic System
Read Text Preview

Extract of sample "Demand & Supply Analysis and Choice of Economic System"

? Question Even though the free market economy functions automatically, explain why in practice most countries adopted some form of the mixed economy in allocating resources. Free Market Economy A free market economy is a market system where transactions between buyers and sellers are determined only by mutual consent. This excludes that one party gets the deal by duress or deception; it also excludes the intervention of a third party – like government – to force or prevent the market. A free market limits government intervention in the application property rights, contract enforcement and verification of consent (Grossman, 2005). The market economy means an economic system where decisions of production, exchange and allocation of goods and services is mainly determined using information derived from the free interaction of supply and demand established by market forces.  Limitations of Market Economic System There are several limitations of market economic system to be implemented in economy. The following are the key shortcomings of a market economic system: Imbalances in Bargaining Power A free market can occasionally result in formation of monopoly, duopoly, oligopoly or a cartel. Such structures create dominance of suppliers in the particular market to the disadvantage of buyers. For this reason, free market economy can potentially impinge on the rights of a certain segment in the economy. A fair exchange implies a relationship of equality between the persons concerned, which is absent in these scenarios. Sometimes, in a market economy the employer and the employee are not in a relationship of equality. The employer can attempt to dictate terms to the employees, therefore, a safeguarding body is required to ensure payment of minimum wages and to enforce health & safety measures. Provision of Public Goods A free market economy cannot provide provision of pubic goods whose benefits are distributed over a very large population and cannot be directly traced. For instance, roads and national defense cannot be provided by a private enterprise. Therefore, some intervention is needed in the market economic system for these provisions (Grossman, 2005). Provisions for Safety Net A free market economy cannot provide social security to the citizens of the country. A market economic system cannot find mechanism to transfer funds from have’s to havenot’s and to help citizens in the lower income groups to rise from the vicious cycle of lower economic strata. State invention is essential for redistribution of wealth and income for functioning of a healthy society. Mixed Economic System A mixed economy is an economic system in which many private companies and a strong public sector coexist. In other words it is a mixture of ideas of the market economy and planned economy. The reason some form of a mixed economic system in in place in almost all countries of the world is that mixed economic system fulfills the above mentioned shortcomings of a free market economy. A government can promote free enterprise while reserving certain areas of the economy through nationalization , or then it privatize all enterprises while creating a legal framework which limits actions which impinges on the rights of certain segment of the economy. Most countries today have a mixed economic system to a certain level. Question 2 – Demand & Supply Changes in Metal and Automobile Markets 2.1 - Impact on the Prices of Palladium Metal following Usage of Replacement Metals it is found that the alternative metals will replace palladium in the process of production of an automobile. This implies a leftward shift in the aggregate demand curve for palladium metal because less palladium will be demanded at each price level. This shift is depicted in the graph below by the movement of demand curve from D1 to D2. Since, the supply of palladium is dependent on the rate at which the metal is extracted from the ores, there is not change in the aggregate supply of the metal (Grossman, 2005). The aggregate supply curve of the metal stays as S1. D2 D1 P1 S1 P2 As the diagram depicts, the equilibrium quantity demanded and price of palladium changes due to the change in intersection points of the demand and supply curves. The two curves now intersect at a point which corresponds to lesser quantity demanded and lower price of the commodity in the markets. The fall in the prices of palladium will not only take place in the long-term, rather an immediate fall in the prices of Palladium will ensue in the commodity markets after the news of alternate material usage does public (Baumol and Blinder, 2011). The change will be spurred by the fact that suppliers and hoarders of palladium will sense that the news will cause a decrease in the prices of palladium. Therefore, they will start selling their stock of palladium metal in the market to get rid of a commodity which is likely to decrease in value in future. This act of selling will increase the supply of palladium metal in the market, which will lead to a decrease in the price. The relative value of the fall in price depends on the percentage consumption of palladium of the total market by Mazda and Nissan. Perhaps, other automobile manufacturers like Ford and General Motors may continue to use palladium and platinum as automobile converters and account for a substantial share of the total market. In such circumstances, the price of palladium may not fall by a significant margin, since the movement in demand curve may represent a very small percentage of the total amount (Halm, 2003). Therefore, the net impact on the price fall may not be much. The quantity of palladium consumed in the market will fall because Mazda would shift to alternative metals for production of converter. 2.2 - Impact on the Markets for Mazda and Nissan following the Implementation of New Technology The implementation of new technology will reduce the cost of production of automobiles made by Mazda and Nissan. This is because alternative metals cost lesser than current prices of palladium. These metals represent a variable cost in the manufacturing process. When the variable cost of production of Mazda and Nissan falls, this results in an increase in cost of production for Mazda at each price level (Baumol and Blinder, 2011). Conversely, the inclination of Mazda and Nissan to supply a given number of automobiles in the market will be higher due to lower average cost per unit of automobile produced, because the cost of production associated with every production level is lower. Graphically, this change in inclination of the suppliers to provide an automobile at each price level is represented by a rightward shift in the supply curve from S1 to S2. Shift from S1 to S2 will change the intersection point of the aggregate supply curve with the aggregate demand curve of the automobile. The new intersection between the two curves corresponds to an intersection point which corresponds to a lower price P2 as compared to original price P1 of automobiles. The new equilibrium price is lower than the previous equilibrium price, which entails that the price of automobiles produced by Mazda and Nissan falls. s1 D s2 P1 P2 The most important shift takes place in the quantity demanded. According to the new equilibrium point, the quantity of automobiles made by Nissan and Mazda increases because at lower price level greater number of customers are willing to purchase the product (Baumol and Blinder, 2011). The relative movements of the price and quantity are dependent on the elasticity of the demand curve. It is anticipated that the new price level will cause an increase in the total revenue earned by the company and the net outcome of investment in Research and Development will be beneficial for Nissan and Mazda (Halm, 2003). A displacement effect is anticipated in the market, whereby, competitors which produce automobiles for the same market will observe a net decrease in the demand of their automobiles, because consumers will shift to a lower priced alternative of automobiles that uses alternate metals as the convertor rather than expensive palladium. 2.3 - Likely Consequences of Non-Adoption of New Technologies in the Automobile Industry is that the respective firm will lose competitiveness in the consumer markets. The one key advantage of investment in R&D and adoption of new technology for a firm is to gain a temporary monopolistic power or a reduction is cost of manufacturing. The above mentioned example of innovation in automobile industry is associated with a decrease in cost of manufacture since a lower priced metal is used in place of an expensive. Absence of such adoptions of technology will entail that the firm will lag behind its competitors and will lose market share in the long-run. References Baumol, W. and Blinder, A. (2011) Economics: Principles and Policy, Ohio: Engage Learning. Grossman, G. (2005) Economic systems, Ohio: Prentice Hall. Halm, G. (2003) Economic systems: a comparative analysis, New Jersey: Holt, Rinehart and Winston. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Demand & Supply Analysis and Choice of Economic System Essay”, n.d.)
Retrieved from https://studentshare.org/macro-microeconomics/1396005-demand-supply-analysis-and-choice-of-economic-system
(Demand & Supply Analysis and Choice of Economic System Essay)
https://studentshare.org/macro-microeconomics/1396005-demand-supply-analysis-and-choice-of-economic-system.
“Demand & Supply Analysis and Choice of Economic System Essay”, n.d. https://studentshare.org/macro-microeconomics/1396005-demand-supply-analysis-and-choice-of-economic-system.
  • Cited: 0 times

CHECK THESE SAMPLES OF Demand & Supply Analysis and Choice of Economic System

E-businese system about Chinese supermarket in UK

Introduction of the E-Business system and Organisation The Chinese grocer chin, Huaxing Chinese Supermarket uses on e-commerce and e-marketing work system that makes to successfully make significant contributions to achieving the organization's goals and objectives.... The company implements the e-commerce business system.... Under the system, the company uses an online website, http://www.... In the e-commerce and e-marketing business system, the current and future customers visit the company's online website (Daft, 2011)....
14 Pages (3500 words) Assignment

Analysis of consequences for the consumer choice

Classical Consumer Theory Classical consumer theory revolves around the interrelationship between consumers' choice based upon their desires and consumption expenditures.... It means that a consumer, prior to making a decision about buying a certain product or service, is rationally concerned with the preference of his choice and the potential expenditure that is likely to be incurred through that decision (Hoyer and Maclnnis, 2008, pp.... This includes liking, disliking, utility, preferences and expenditures of that choice....
6 Pages (1500 words) Essay

Impact of Scarcity and Choice on the Laws of Supply and Demand

In the paper “Impact of Scarcity and choice on the Laws of Supply and Demand,” the author discusses the twin concepts of demand and supply.... Another way t approach consumer analysis is by focusing on the utility and choice pattern of consumers.... (Modern,2006) "Economists usually make some of the following key assumptions and conditions when they study economic problems (1) Individuals are (bounded) rational: self-interested behavior assumption ;(2) Scarcity of Resources: Individuals confront scarce resources;(3) Economic freedom: voluntary cooperation and voluntary exchange;(4) Decentralized decision makings: One prefers to use the way of Decentralized decision making because most economic information is incomplete or asymmetric to the decision marker ;(5) Incentive compatibility of parties: the system or economic mechanism should solve the problem of interest conflicts between individuals or economic units;(6) Well-defined property rights;(7) Equity in opportunity and (8) Allocative efficiency of resources....
3 Pages (750 words) Essay

Supply Chain Technologies into High Street Fashion and Airline Industries

Under this traditional system, high street fashion houses competed on the basis of designs, quality brand image, and productivity and were able to command higher margins.... An evaluation of how supply chain technologies and business process re-engineering are influencing the theory and practice of operations management in the supply chains of b) High Street fashion and c) airline industries The paper is divided into three parts.... hellip; The first part is an overview of the two industries - high street fashion and airlines - in general, their key challenges, and the traditional theories and practice of operations management in their supply chains....
14 Pages (3500 words) Case Study

Economics: Public Policy in Health and Social Care

More recently it… sought to apply a broader theoretical and conceptual tradition of economic thought by placing emphasis on neo-classical synthesis – a combination of neo-classical economics and Keynesian economics. Conservative economics is based on Milton Friedman's teachings and Friedman's main argument is that tax cuts and little or no intervention by the government in regulating private enterprise would help entrepreneurs to produce more at a lower cost.... His economic thoughts though aren't substantial are concerned with how working classes are able to run the country's economy with fair play and social justice....
11 Pages (2750 words) Essay

BlackBerry: Understanding Economic and Political Performance

A paper "BlackBerry: Understanding economic and Political Performance" points out that the demand influence emanates from issues such as the user compatibility, the originality of data and the ability to prompt anyone in the case of loss or emergency.... The sale of BlackBerry determinants focuses on the price mechanism of demand and supply.... On the supply side, there is the involvement of supply chain management.... The main concentration of the supply chain of the BlackBerry involves the suppliers, intermediaries and the final consumer of the product (McGuigan, Moyer & Harri, 2010)....
6 Pages (1500 words) Assignment

Agile Supply Chain Principles and Practices

These companies have got to participate in overall technology changes, as otherwise, supply chains cant be a homogeneous and smooth system, as some entities will be holding back the progress.... … The paper " A Critical Review of Agile supply Chain Principles and Practices" is a wonderful example of a term paper on management.... It is the ability of the firms and the partners in the supply chain, to sense the changes in the market place, and react to the same very fast....
10 Pages (2500 words) Term Paper

Microeconomics: Theory of Supply and Demand

he main goal of economic sustainability is to establish economics that is economically viable, socially responsible, and environmentally sound.... lthough the concept of economic sustainability looks rather simple, its implementation is often hampered by a number of obstacles such as resistance to change which often leads to inefficient utilization of the available resources.... Basically, the objective of economic sustainability is to ensure that the business remains profitable and continues to grow every all the time (Nicholson, 2004)....
7 Pages (1750 words) Report
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us