a ) In an economic system, there are three different types of market. They are free market, command economic system, and assorted economic system. However, the first two will be chiefly described in this subdivision. There are both advantages and disadvantages in utilizing those two. If a state ‘s resources are to be allocated on a footing of monetary value mechanism, that is, resources are merely determined by their supply and demand for them and there will be no intercession of authorities. It is, in other words, called free market.
ADVANTAGES OF FREE MARKET
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There are many advantages in a free market economic system. First of all, free market can do manufacturers adjust to alter easy. In other words, companies can alter what they produce when there is a demand for one specific type. For case, if one type of steel is going popular for building, we can get down bring forth that type of steel. There is no authorities limitation.
Therefore, it encouraged rational ego involvement. It is because people have freedom to make what they want, make what they want and sell what they want to a certain extent. Although it is non true that authorities wholly stays out, people can make most of their concern as they please.
Another major advantage is that, the free market gives a batch of picks because of great assortment of goods and services for the clients. This happens because of monolithic addition in efficiency and productiveness.
Furthermore, the following advantage is that, the presence of competition. Competition is healthy as it encourages research and development. Invention and invention are made possible with scientific discipline and engineering. With the being of such elements, economic growing can be achieved. Manufacturers will maintain on bettering their techniques of production in order to vie with other houses.
DISADVANTAGES OF FREE MARKET
In contrast, there are besides drawbacks of the free market economic system. In world, there are no perfect free market economic systems. The major disadvantage is that to be most effectual it needs some ideal environmental conditions like full, free and instantaneous handiness of all relevant information to all purchasers and Sellerss. It besides requires complete freedom to industries from one industry to another. Perfect conditions like these are possible merely in theory.
Another major restriction of free market is that it can non cut down the difference between the rich persons and have non since everyone can purchase or sell freely harmonizing to their will. Therefore, because of the imperfectness in the system, the free market system merely increases the disparities between people.
Another drawback of free market system is the being of unemployment. As the economic system is governed by the “ unseeable custodies ” , there is normally a disparity between demand and supply. If supply of labor is greater than the demand for workers, unemployment will happen. This point clearly explains the high unemployment rate in most capitalist provinces.
B ) If a state ‘s resources are allocated on the footing of planning and predicting, it is called planned economic system or bid economic system. It has besides been defined in assorted ways. Government will be involved and use resources such as, land, labor and capital to advance the economic system of the province. Alec Nove ( 1987 ) defined it as an economic system in which the cardinal authorities makes all determinations on the production and ingestion of goods and services. However, they are all the same.
ADVANTAGES OF PLANNED ECONOMY
Refering the advantages of planned economic system, the most of import one is stableness. Since the economic system has already been planned, long-run investings can be made without worrying about when the economic system will worsen ( market downswing ) , or losing assurance. Every investing needs to hold stableness. It is specifically of import where returns are hazardous and diffuse. Therefore, by holding stableness, investings can be made more safely.
The following advantage is that planned economic system normally intended to function jointly instead than separately. It is chiefly used for systems such as wagess and rewards which are to be distributed harmonizing to the value that the province ascribes to the service performed.
Another of import advantage is that, planned economic system can avoid major booby traps of free market, which was among the most of import factors for socialist economic experts of the early twentieth Century. The planned economic system is non subjected by concern rhythms, it do non see crisis such as overrun, since it is carefully planned for both present and future.
In contrast to the free market economic system, in a planned economic system, theoretically, there is no difference between the rich and hapless. It is besides considered as a classless society. In other words, there is no difference between the rich persons and the rich person non. However, in pattern, there is still a spread between the two groups although the spread is non every bit evident as in a capitalist system.
DISADVANTAGES OF PLANNED ECONOMY
In contrast, there are besides some major disadvantages in planned economic system. There can be both excess and deficit in resource distribution. From the modern point of position, deficit means an wrong matching between supply and demand, in other words, the contrivers must hold misjudged the demand for the merchandise, the equilibrium monetary value, or both. In a free market economic system, such instability would be corrected within a twelvemonth, will last longer even for decennaries. In add-on, there is besides a job of excess. Surplus in resource distribution means that there is a waste of labor and stuffs that can be used for both production and society.
Another major disadvantage is the deficiency of inducement for invention. It is argued that planned economic system is less likely to advance invention than the free market. Lack of invention will consequences in low morale degree of the workers. If the workers are non motivated plenty, they may non go on to work and a company ‘s productiveness will besides diminish.
The concluding disadvantage is the violation on single freedoms. It is argued that the planned economic system requires a province which intervenes extremely in people ‘s personal lives. For illustration, if goods are allocated by the province, people will non be able to travel to another location without province permission because they would non be able to get nutrient or lodging in the new location, as the necessary resources were non preplanned.
Section – 2 ( Task – 2 )
The demand curve, D, shows the measure demanded by the clients. Quantity demanded is an sum of measure in which the consumers want to purchase their needed merchandise. The supply curve, S, shows the measure supplied by the clients, which is the sum supplied to the market by the manufacturers. Equilibrium monetary value is the monetary value at which the measure for the demanded peers the measure supplied. The figure shows how the equilibrium monetary value plants. The point E indicates the equilibrium monetary value. As mentioned, this happens when the measure demand equals quantity supply. When Tocopherol is established, equilibrium monetary value, P1 and equilibrium measure, Q1 can be easy determined. If the steel monetary value is increased, from P1 to P2, the measure supplied becomes extra as shown in the diagram. In contrast, if the monetary value of steel is decreased, from P1 to P3, the measure demanded becomes extra. Those two tendencies are clearly shown in the diagram.
B ) In general, there are a batch of factors that affect the demand and supply for steel. For the demand, there are three chief factors. They are the monetary value of related goods, consumer incomes and penchants or gustatory sensations. As for the supply, engineering, input costs and authorities ordinance are the three chief factors.
FACTORS AFFECTING THE DEMAND OF STEEL
The monetary value of related goods
The first 1 is the monetary value of related goods, the monetary value of replacements. It can be assumed that aluminum is a replacement for steel since it has the same features as steel and can be used alternatively of steel. Therefore it is possible that if the monetary value of aluminum falls, the measure demanded for steel will cut down. In contrast, if the aluminum monetary value additions, the measure demanded for steel will increase.
If the consumers get higher incomes, it is likely that they are willing to better their life criterions. Once they are willing to make that, they will utilize more merchandises, for illustration, trade name new cell phones which are made with unstained steel. If the populace is purchasing such merchandises, the manufacturers will bring forth more and the demand of steel will increase.
Another factor is the penchants. It is because there are many types of steel and many utilizations for steel. Although they are used in place contraptions such as kitchen ware, steel is chiefly used in building sites. Even if it ‘s narrowed down to building sites, different types of steel are used for different edifices. Besides, there can be occasions where certain types of steel and designs are going popular. If that happens, that certain steel type will acquire higher demand than other types.
FACTORS AFFECTING THE SUPPLY OF STEEL
Refering the factors impacting the supply of steel, all three ( engineering, input costs, and authorities ordinance ) reference above are included. Every goods must be made with their ain methods and since steel can non be made in simple manner, ( it needs machines and tools ) so, engineering plays a critical function. If one company uses better and required machines and tools to bring forth steel than other company, that one will be able to bring forth more.
Input signal costs
Input signal costs must besides be considered. The ground is simple. Steel requires certain sum of Fe and C, and different types of steel require different sum of constituents. Therefore, if a type of steel, which requires more sums of constituents than the others, is traveling to be produced, the production cost would be really high and that will impact the supply.
Government policies can both increase and diminish the measure supplied of steel. Some signifiers of policies are production quotas and production subsidies. Production quota can be applied to single worker, industry or state. Quota can be used to promote production or bound it to command the supply of goods. Besides, since quotas increase the domestic monetary value of the restricted goods, merely as duties, it affects the measure supplied. If authorities provides direct production subsidies, by hard currency payments for production of steel, it is to promote the development of steel industry.
Section – 3 ( Task – 3 )
a ) The short tally is the period in which the house can non to the full adjust to a alteration in conditions. In the short tally, the house has some fixed factors of production. A fixed factor of production is an input that can non be varied. In short-term, at least one factor of production is fixed. As mentioned above, there are three chief factors impacting the supply of steel. Obviously, input costs are variable and since the usage of engineering can non be varied, it can be considered as a fixed factor of production. Furthermore, due to the fact that the engineering is the most of import factor, the supply of steel mostly depends on it. If one company had produced and still go oning to fabricate certain type of steel, for illustration high-velocity steel, with the same method of production ( engineering ) , the supply of steel will be fixed in the short tally.
The diagram shows supply curve for steel in short-run. Since it is in inelastic status, alteration in monetary value, from P1 to P2, is more than alteration in measure 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-term. Bing in an elastic status the supply curve is flatter than the inelastic 1. In this status, the alteration in monetary value is less than the alteration in measure supplied.
There are different types of steel that can be produced. Different types of steel require different methods and clip. For illustration, steel that is manufactured for edifice sites would take yearss to finish while those for place contraptions would take at most one twenty-four hours. The length of production procedure is one of the factors impacting the snap of supply. Elasticity of supply will alter if resources in production can be easy transferred from one good to another, for illustration, from C steel to stainless steel, although unstained steel costs merely a little more than C steel. Furthermore, there will be barriers to entry. Any signifiers of barriers will forestall supply from seting to any monetary value alterations. Therefore, it will accordingly consequences in altering the snap of supply.
degree Celsius ) The purpose of the monetary value ceiling is to cut down the monetary value of a merchandise ( steel ) . However, there are still some other ways to take down the monetary value of steel. First of all, is holding a rational policy. Its intent is to give fixed sum of trade good to each individual during the clip of deficits. It happens because of deficit in supply. Consequently, the job of supply deficit will ensue in the decrease in monetary value. Second, is by nail downing the monetary value. When the monetary value is pegged ( fixed ) , goods can non be sold above or below the fixed monetary value. Price is pegged merely to cut down the original monetary value of a good. The last method is to increase the import. By increasing the imported goods from other states, it is possible that those goods are better in quality and worth more than the local goods. If so, the monetary value for local merchandises will be reduced.
Section – 4 ( Task – 4 )
a ) A monetary value ceiling is a government-imposed bound on how high a monetary value can be charged on a merchandise. Price ceilings are frequently intended to protect consumers from certain conditions that could do necessities unachievable. However, monetary value ceiling can besides do jobs if it is used for an drawn-out period of clip without controlled rationing.
The monetary value ceiling creates a deficit of supply comparative to demand by cut downing nutrients and goods ‘ monetary values below their equilibrium degree. The point E indicates the free market equilibrium, which occurs when the measure supplied meets measure demanded. When equilibrium is founded, P1, free market monetary value at equilibrium and Q1, free market equilibrium measure can be determined as shown in the diagram. The line AB is the extra demand, which was resulted when monetary value ceiling at P2, is established. It besides reduces measure supplied from Q1 to Q2. Although the monetary value ceiling succeeds in keeping down the monetary value, it leads to extra demand. Above diagram can besides be used as a monetary value ceiling for steel. P1, and Q1, are the equilibrium monetary value and equilibrium measure severally for the steel. Harmonizing to the theory of the monetary value ceiling, when P1 is reduced to P2, the measure demanded for the steel will increase and the antonym for the measure supplied. When the monetary value is reduced, the sum of steel supplied Q1 moves to Q2, thereby cut downing the measure supplied. It is because the steel providers will non provide every bit much as earlier as the monetary value lowered down.
degree Celsiuss )
The above diagram shows the consequence of monetary value ceiling on the demand for steel. The equilibrium monetary value, P1, and the equilibrium measure, Q1 are founded one time the measure demanded for steel peers measure supplied, ensuing in equilibrium point, E, being established. Since the intent of the monetary value ceiling is to cut down the monetary value of the steel, when P1 is reduced to P2, the measure demanded increased from Q1 to Q2. It means that if the monetary value of steel is reduced, the measure demanded for steel will be increased, and the infinite between A and B becomes extra demand, as shown in the figure. The ground is simple. For the supply, for every goods, the manufacturers or providers will provide less and less as the monetary value reduces since that cut down their income and net income. As for demand, steel users, for illustration, building sites and auto makers will purchase more in order to be able to construct more and bring forth more, ensuing in measure demanded being surplus.
Section – 5 ( Task – 5 )
a ) The purpose of a monetary value ceiling is to cut down the monetary value for consumers. When Politburo introduces monetary value ceiling on steel, it is clear that the monetary value of steel will be reduced. Since Politburo is meaning to administer the wealth to ordinary Russians, it is likely that even some hapless people who require steel for their ain ground will afford to purchase. Although it is an advantage to the clients, it is non favorable to the companies that are bring forthing steel. It is because, lawfully, they have to cut down the monetary value to provide in the free market and accordingly, that will take down their income and net income. The companies may still provide to some extent, nevertheless when some conditions, such as when the production costs become higher than the merchandising monetary values, arise, they may halt bring forthing steel and shut-down instances might happen.
B ) When Politburo introduces monetary value ceiling, although it reduces monetary value for clients, some negatives, which are shown below, might happen.
Decrease in quality
Legally, it is true that monetary value ceiling cut down the monetary value for clients. When monetary value ceiling is introduced, the most obvious thing that the provider is likely to make is to cut down the input costs. Clearly, when input costs are lowered, the quality of steel will besides be lowered. The period, before the monetary value ceiling is introduced, steel bring forthing companies would utilize better natural stuffs ( Fe and C ) than the period when the monetary value ceiling is introduced. Therefore, in the latter period, the merchandise ( steel ) becomes lowered in quality.
Illegally, monetary value ceiling increases the monetary value. When clients can non obtain a good ( s ) they need, since monetary value ceiling reduced the measure supplied, they may look in the black market to acquire what they need. Those who got lucky or good direction acquire more net income by selling the goods illicitly in black market. The monetary value in the black market is higher than the free market monetary value since the measure supplied is less than that on free market where more Sellerss could afford to sell the merchandise.
When there is a deficit in supply, because of monetary value ceiling, the steel providers will know apart in who is able to purchase from them. It is possible that they will give favor to rich people. As a consequence, merely rich people will acquire chance to utilize steel for their demands. However, this lone occurs when there is a deficit in supply.
degree Celsiuss )
Since the intent of the monetary value ceiling is to cut down the monetary value of steel for consumers, it besides decreases the income for the providers. If the income is lowered, the providers will non provide steel every bit much as before and therefore, the measure supplied lessenings. Furthermore, some providers may halt bring forthing steel and bend to other industry, thereby significantly cut downing the measure supplied in market. As a consequence, it can be said that the monetary value ceiling, introduced by Politburo is doing the state of affairs worse.
Even though monetary value ceiling has advantages in some instances, there are some grounds why the monetary value ceiling, imposed by the Politburo is doing the state of affairs worse. Since monetary value ceiling reduces monetary value for clients, lawfully, the steel bring forthing companies gain less net income as shown in the figure and some companies might shut-down. Eventually, some companies which will non shut-down will turn their involvements to black market. It is described in the first diagram in this subdivision which is resulted in the steel manufacturers selling in black market in order to acquire more net income. It is because the monetary value in black market is higher than that in free market as less measure is supplied in black market. Therefore, it can be said that monetary value ceiling, which is introduced by Politburo is doing the state of affairs worse.
Section – 6 ( Task – 6 )
Alec Nove ( 1987 ) , “ planned economic system, ” The 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.
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hypertext transfer protocol: //en.wikipedia.org/wiki/Free_market ( Accessed on November 1, 2009 )
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hypertext transfer protocol: //en.wikipedia.org/wiki/Price_ceiling ( Accessed on November 5, 2009 )