A market system is any logical process that enabling many market players to bid and ask. A command economy can also say that a planned economy, this mean that the economy has been planned by the government. Economic scarcity is unlimited want and there are limited resources, so this can be an issue to the economic. There can be a mixture for a market system and a command economy, it is a mix economy. A mix economy means that there is intervention of government in the market system to try to cope with the economic scarcity.
The government can control the market system by put in how many quantity the firm can produce and also can put in a price ceiling on the product. Most of the firm is just willing to produce high profit goods, take houses as example. The firms are more willing to produce double story single houses rather build a flat, because building a double story single houses because, it is more expensive than a flat and they can earn more profit. Because of the economic scarcity, the government had control the firm how many units of double story houses they can produce.
PART A
Using appropriate examples, explain any two (2) determinants of price elasticity of supply.
First example of determinants of price elasticity of supply is the number of producers. As there are more producers in the market, the easier it should be for the market to increase its output in due to a price increase. Thus, Supply will be more elastic. As the market prices of milk increase, there will be some firm move from other industry in to the milk industry, thus the supply for milk increase due to more producers. The other determinant of price elasticity of supply is the length of the production period. The shorter time period if take a good is to produce, the easier it will to respond to a change in price. So this will be more elastic. Take that, a firm that make soccer ball it take a shorter time period than a fruit industry. They can move in to the basketball ball is faster than the fruit, because they can use same machine and technology to produce basketball but for fruit, they need to replant the tree and have to wait for few years for it to grow. So the soccer ball industry is more elastic then the fruit planting industry.
PART B
Explain how businesses use the concept price elasticity to decide on their pricing strategy.
The business can use price elasticity of demand (PED) to decide on their pricing strategy. The law of demand shows that, weather the consumer will buy more or less of that product when its pieces decline or increases so this can be a good idea on the pricing strategy. When the PED is greater than 1, it means that it is elastic demand; when PED is smaller than 1, it is inelastic; when PDE is equal to 1, it is Unit Elasticity.
As the PDE is greater than 1, is there is an increase in prices, the demand for it will fall. This normally is items that have a lot of substitutes, e.g. coffee and hamburgers. As the firm increases the prices, the consumer will shift to the other good, as three's an increasing prices in hamburgers, the consumer will shift to sandwich because sandwich is cheaper than hamburgers.
If the PDE is lesser than 1, it is inelastic. When there is an increase in prices, the consumer will still buys the goods. This is a goods have no substitutes example, salt, sugar and pepper. As the prices increase, the demand for those goods will still be demanded by the consumer.
The firm can calculate PDE for the product and just decide on increasing or decreasing the price of the goods to earn higher revenue and profit.
PART A. Explain any three (3) reasons why supply of a product increases. (9 marks)
Supply is a curve that showing the various number of a product that producers are willing and able to produce and sale at a price in a period of times. First reason of the supply of a product will increase is, decrease in prices of resources. It means that, by using same amount of production cost, the firm now can produce more than before. The resources can be raw material. Second reason will be new technology. When a new technology had brought into a business, it will increase the quantity of production and also will produce more by using lesser time, say that the old machine can produce 1000 unit of pens a day, but now the new machine can produce 1500 a day, this will increase the supply of that production. And the final reason is the prices of other goods. The goods can be substitute goods. Substitutes good can be VCD and DVD. Say that a firm that produces basketball, if the prices of soccer balls when up, they may use their same equipment and planning to produce soccer ball.
PART B
What do economists mean when they say that "price floors and ceilings stifle the rationing function of prices and distort resource allocation"? (11 mark)
A price floors is a minimum prices that the product can be sell in the market that set by the government; Price ceiling are the maximum prices that the product can be sell in the market that set by the government. For example, sugar had a price ceiling of RM4.50 per kilo, because sugar is a need for consumer and it had no substitute goods to go with him. Price floor normally put onto wages. In Australia, all the firm should paid their worker a price floor of $3.50 per hour, because the government wanted to help the people to have a better live, that why Australia have a higher living standard.
In diagram 1, it shows the floor price. The floor price line is from above the equilibrium point. This will end up with a surplus. The paid for the worker is $3.50 per hours, so there is a surplus of workers who wanted to find a job.
Diagram 1
In diagram 1.1, it shows the price ceiling. The price ceiling line is below the equilibrium point and demand is higher than supply so this will end up with shortages. And there is RM4.50 per KG of price ceiling for flour.
Diagram 1.1
The rationing functions of prices and distort resource allocation are the higher profit industries will have more firm in that area. Upon the prices of the good been set on a ceiling price, the producer are less willing to produce the goods because now the profit is lower for flour. Lastly, the firm will move to other industry that the profit is higher. This will distort resource allocation and will form inefficiency or misallocate of resources in that industry. In the other hand, when there is a floor price is wages been set, the firm will stop hiring more people to work and they may cut off some of the unnecessary workers. This will effect a short term of rising unemployment rate and it also will cause inflation. But for long time it will advantage the countries, because it lift the living standard.
QUESTION 5
PART A
Explain and illustrate the difference between a decrease in demand and decrease in quantity demanded. (10 mark)
Demand is a curve that shows the various numbers of goods that the consumers are willing and able to buy at a price and in a period of time. Decreasing in demand mean that the demand curve shift to the leftward, so the prices stay the same and the quantity decrease, this had shown in diagram2. This issue is not causes by increase or decrease in prices, this leftward shift of curve can cause by decrease in household income. When the household income decrease, they will not going to spend as much as before and they are just spend it on the need and lesser for the want.
Diagram 2
Price of good
D1 D0
Quantity of Demand
Decreases in quantity demanded mean that, the price of the goods when up and the quantity demanded from the consumer decrease. In diagram 2.1, it shows that a RM 1 increase in milk, the quantity demanded decrease from 1000 to 600 quantities. In conclusion, a decrease in quantity demanded mean that there are a movement on the curve. The point will move from point A to point B.
Diagram 2.1
Price of Good
B
A
Quantity of Demand
PART B
Define income elasticity of demand. Describe any three (3) degrees of income elasticity of demand. (10 mark)
Income elasticity of demand is the ratio of percentage has changes in quantity demanded 'QD' of a goods over a percentage change in consumer income 'I'. In other words, income inelasticity of demand means a measurement of responsiveness of consumer buying to change in income.
Formula
For most of goods, the income-elasticity will be positive. It means that, the more it will be demanded as income rise, this are called normal goods or superior goods. For inferior goods, there will be a negative income elasticity confection because, as income increase, the quantity purchase for those goods decrease.
