Economic system is a combination of rules which carried out by a firm or government and allocate its production of goods and services in a society. Basically, economic system is categorized into three types which are market system, command system and mixed economy. Scarcity is one of the economics concepts. Scarcity occurs is because we have limited resources compare to the things that we human need is not limited.
Market system is also known as capitalism system. This economic system is a laissez- faire which does not involve with the government. Individual and private sector played an important role by making decision in economic. Consumers determine the quantities of good to be produced where by producers will see whether the quantity demanded by consumers is increasing or decreasing, so that producers can know how much the amount of goods should be produced. In market system, price of a good is determined through price mechanism, which is through the ability of interaction between market in demand and supply. Quantity of the goods that have to supply has to be controlled by price mechanism.
Besides that, households and firm has their own target. Household's objective is to maximise their satisfaction whereas objective for firm is to maximise their profit or minimum the cost of production. Price mechanism can help to solve problems between households and firm because it allows households (consumer) and firm (supplier) to interact by analysing pricing strategy and equilibrium price of goods and services. According to Hashim Ali 1998, page5, states that as producers are only motivated by profits, they will cater to the needs of the rich customers and it will result in the over-production of certain goods. For example, Canada and USA uses this economic system.
Command economy as known as planned economy. This economic system is only involves with government or we call it as central authorities. It does all the decision making which include what will produced and how much quantity should they produced. Individual and private sector do not have the right in decision making, but only to accept all the decision made by the government. Other than that, price and quantity of goods is also set by the government. Equilibrium price of goods and services will not be able to satisfy consumer and producer but at the same time it is fair to everyone. Government will allocate the scarcity concept to the poor ones and not only for the normal or rich one who can afford to pay for the goods that they want. For example, Cuba and China uses this economic system.
In conclusion, in market system consumer not only to determine on what will be produced, whom going to produce, how do produce. It will depend on the citizen's economic problem of scarcity. However, command economy is a very fair economic system compare to others. When there is scarcity in economic systems, market system will try to maximise their satisfaction especially for the rich ones. Whereas, command economy does not have gap or differences between the rich and the poor, everyone is equal.
Question 2
Part A
Price elasticity of supply can be specifying as responsiveness of the quantity of a product supplied to a change in price. We have acknowledged how quantity supply responds to changes in price. There are a few determinants of price elasticity of supply; I will give two examples and explain the determinants of price elasticity of supply.
The first determinant of price elasticity of supply is time period. Time period divided into two parts which is short run and long run. In economics the short run is defined as the period of time which at least one input is fixed in a business. For example, machinery and land of the business cannot be expended. Whereas, output can be expend by employing more labour and also raw materials. The supply curve for short run is inelastic, because percentage change in quantity supply is lesser than the percentage change in price.
For example, the machinery and land that belongs to the owner of a pineapple farm is fixed. By applying more labour and fertilizer to the pineapple, we will be able to increase the productivity of the pineapple.
In economics the long run is also defines as the period of time which the inputs of the business can be change in the long period of time, including machinery and land of the business. The long run support proportionate time for firms to build new facilities and expend the existing facilities. The supply curve for long run is elastic, because the percentage change in quantity supplied is more than the percentage change in price.
For example, the owner of the strawberry industry gain profit by increasing the size of the land which is fixed in short run and using quality fertilizers, because the owner wants to increase the productivity of strawberry. It means that the machinery and land is fixed in short run, can also be increased in long run.
Nature of the goods is the second determinant of price elasticity of supply. Nature of the goods can be divided into two types, which are primary goods and manufactured goods. Primary goods are inelastic supply. For example producer of bread for quantity supplied is 6% and the price is 18%. This means that percentage change in quantity supplied is less than percentage change in price. Whereas manufactured goods have more elastic supply of price compare to primary goods. For example, producer of bread for quantity supply is 30% and price is 22%. It means that percentage change in quantity is more than percentage change in price.
The two determinants and examples that written above is time period and nature of the good. These two are the factor that affects the elasticity of supply.
Part B
Price elasticity of demand can be specifying as responsiveness of quantity demanded to a change in price, whereby total revenue is price multiplied by quantity sold. We have acknowledged how quantity demanded responds to changes in price. In this question, I will give two different cases how business uses this concept to decide on pricing strategy.
The first case will be elastic demand. When demand is elastic, the price increases and will cause total revenue to fall and vice versa. For example, if price increase from RM4 to RM5 of a packet of chips and reduces the sales of chips from 18units to 10units. The price elasticity of demand for chips is -1.76. The initial total revenue is 72 and the new total revenue is 50. (See case 1)
Price (RM)
5
4
D
Quantity (unit)
18 10
Case 1: Elastic demand
The second case is inelastic demand. When the demand is inelastic, the price decreases and will cause the total revenue to fall and vice versa. For example, quantity of 50 sweets is bought by a kid when each sweet is RM4 and quantity of 60 sweets when each sweet is RM3. The price elasticity of demand for sweets is -0.8. The initial total revenue is 200 and the new total revenue is 180. (See case 2)
Price (RM)
4
3
D
50 60 Quantity (unit)
Case 2: Inelastic demand
In conclusion, for demand elastic when price increases it will affects the total revenue to fall and vice versa whereas in demand inelastic, when price decreases will also affects the total revenue to fall and vice versa.
Question 3
Part A
Supply is quantity of a good which producers want or willing to sell at a different price level within a certain time period. The supply would not exist if the producer only have the thoughts but do not have ability to supply. In the law of demand written that when the price of a good increases, the quantity supplied of the good will also increase and vice versa. The relationship between price and quantity supplied of a good is positive.
Increase in supply is where the curve shifts rightward and it is upward sloping. The first factor that increases the supply of a product is technology. If a firm uses advance technology, it will reduce the cost of production and will increase the quantity of supply. It means that changes in technology will affect the supply of the good changes. For example, if advance machinery is been used in a firm to produce can drinks, it reduce the cost of production and producer will take this opportunity to produce more can drinks at this period of time. (See figure 1)
Price (RM)
S0
S1
Quantity supplied of can drinks
Figure1
The second factor that increases the supply of a product is cost of production. Changes in cost of production will affect the supply of good. If the salary of the workers falls and the price of raw materials decreases, supply of the goods will definitely increase. For example,
when the price of the flour decrease, the supply of bread will increase. (See figure 2)
Price (RM)
S0 S1
Quantity supply of bread
Figure 2
Expectation is also one of the factors that increase the supply of a product. When producers estimate the price in the future will increase, it means that producers will increase the supply now and then. For example, price of salt is expected to decrease in the future, the quantity supply for salt today will increase and in future will decrease. (See figure 3)
Price (RM)
S0
S1
Quantity supplied of salt
Figure 3
The supply curve will shift rightward when there is a change in supply. The change in supply are affected by many other determinants of supply such as price of other goods and cost of production, except for the price of the goods itself is not belongs to the factor of change in supply.
Part B
Market is where buyers and sellers got to meet each other, in order to run a business in terms of goods and services. Buyers and sellers of a good which affect the price in market. Price ceiling as known as maximum price and it is below the equilibrium price. Whereas, price floors is also known as minimum price and it will above the equilibrium price.
Price floors is a minimum price that had been fixed by government. Price floors is where quantity demanded less than quantity supplied and it is called surplus. Any price that is above the price floors is a legal price. For example, the producer produce more goods in this period of time will not be a good sign because the goods have to be sold to supplier at a minimum price. In this situation, because of too many goods had been produced and demand of the good is not there, suppliers have no choice only to sell those goods at low price in order to clear them away. (See figure 1)
Price (RM)
Surplus S
............................. Price floor
Pe-----------------
D
Quantity
Figure 1: Price floor
Price ceilings is a maximum price. Price ceilings is where quantity demanded more than quantity supplied and it is called shortage. Any price that is below the price ceilings is a legal price. Price ceilings will able to give customers at a low price, and to ensure them to pay lesser from the equilibrium price. Price ceilings occurs is because government wants to prevent unfair distribution for example, only distribute to a certain area and not others. In price ceilings, consumers are able to afford to buy the goods that they want, when the price of the goods is lower than the equilibrium. (See figure 2)
Price (RM)
S
Pe-----------------
............................... Price ceiling
Shortage D
Quantity
Figure 2: Price ceiling
The equilibrium price occurs is where the demand curve and supply curve overlap on top of each other. If the price and quantity of demand curve and supply curve are the same, in this situation we called it as equilibrium.
Question 5
Part A
Demand refers to the quantity of a good or service that a consumer has the ability and willingness to pay for it at a different price level. The law of demand states that if the price of the good rises, the quantity demanded of the good will falls and vice versa. The relationship between price and quantity demanded of a good is negative.
Decrease in demand is where the demand curve shift leftward and it is downward sloping. The price of related goods including substitute goods and other factors can shift the demand curve except for the price of the good itself. For example, if the price of the Dell laptop decreases, it will affect the demand of the Apple laptop to decrease. Hence, quantity demanded for Dell laptop will increase. In this situation, quantity demanded for Dell laptop move downward along the same demand curve. Demand for Apple laptop will shift leftwards from D0 to D1. (See figure 1)
Price (RM)
D0
D1
Quantity demanded for Apple laptop
Figure 1: Decrease in demand
Decrease in quantity demanded is a movement upward along the same demand curve when quantity demanded changes and the curve is downward sloping. In this situation, it has only one factor which is the price of the good itself that causes the change in quantity demanded. For example, a packet of fruits increase from RM1 to RM3, the quantity demanded by consumer decrease from 60 to 30 packets per day. A movement upward along the demand curve, from B to A shows a decrease in quantity demanded for a packet of fruits, because of the increase in price of a packet of fruits from RM1 to RM3.
(See figure 2)
Price (RM)
3 A
1 B
D
30 60 Quantity demanded for fruits
Figure 2: Decrease in quantity demanded
The main difference between changes in demand and changes in quantity demanded is movement and shift. Shifts of a demand curve cause by other factors that can affect the demand except for the price itself. Besides that, movement along the demand curve has only one factor affecting change in quantity demanded is the price of the good itself.
Part B
Income elasticity of demand is where the percentage change in quantity demanded divide by the percentage change in household's income. Income elasticity of demand is also known as YED. Income elasticity is divided into three types which are positive, negative and zero income elasticity of demand.
Percentage change in demand
YED =
Percentage change in income
Positive income elasticity of demand is when income elasticity greater than 0, (YED > 0). When income increases, the demand will increase. It can be classify into two types that is income inelastic and income elastic.
Income inelastic is (0 < YED < 1). When the good is a normal good; it means that the quantity demanded will still increase in a smaller percentage, even though the income is increasing. For example, food and clothes.
Income elastic is (YED > 1). When the good is a luxury good; it means that the quantity demanded increase in a larger percentage than the increase in income. For example, branded goods.
Negative income elasticity of demand is when income elasticity less than 0, (YED < 0). When income increases, the demand towards inferior goods will decrease. For example, when our income increases from RM1 to RM2, the amount demanded for low quality goods will decrease from two to one unit. An example for inferior goods is salted fish.
Zero income elasticity of demand is when income elasticity equals 0, (YED = 0). If income increases, quantity demanded does not change. Necessity of good like rice and sugar.
