# Essay: Economies, Resource Allocation and Price Mechanism

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Section A: Microeconomics

Question 1

A. Market Equilibrium

(Fig. 1)

Market equilibrium is the position at which the demand becomes equal to the supply and this helps in analysing the price which needed to be charged, and such price is known as an equilibrium price. The equilibrium price is the point where demand and supply interact with each other. The price is believed to be constant until an external force affects the demand and supply of the goods, and such can result in the shift in the curve (Schneider, 2013). Therefore, the demand and supply data shows that the demand and supply are becoming equal at 50m units when the price is charged at £30 from the customers. The market equilibrium price for SmartWatch is £30, and the equilibrium quantity is 50m units annually.

B.Supply and Demand Schedule

(Fig. 2)

The increase in the price at £40 would affect the demand in an inverse way which means that that the demand will decrease with an increasing price. The price plays a major role in the demand of a product, and the law of demand states that an increase in prices will decrease the demand when other things are kept constant (Arnold, 2008). After evaluating the above figure, it has been evaluated that the price of £40 will result in the demand decrease at 30m units annually.

(Fig. 3)

The price and supply have a direct relationship which states that an increase in the price will result in increased supply. The law of supply states that the supply will be affected only by the price, and the other elements are kept constant and the increase in price will increase the demand (Arnold, 2008). Therefore, it can be stated that an increase in price at £40 will result in an increase in demand, and this can be evaluated from the graph above which shows that when the price becomes £40, the supply becomes 70m units per year.

Income Effect

Normal goods are the goods, whose demand shows a direct relationship with the income as such goods are the goods that the customers demand when the income increases, and the affordability also increases. The goods whose demand falls when the income of the individual decreases, and the demand increases when the income is increased are known as normal goods (Gans, King and Mankiw, 2011). Therefore, assuming SmartWatch as a normal good, then the demand for such will increase, when the income of the individual increases. This effect is also known as income effect which states that when a person is earning more, then his affordability and capability is also increased, which provides him more opportunities to purchase quality products. Therefore, the demand for SmartWatch will increase when the income will increase, while the other elements or factors remain constant.

Question 2

Price Elasticity of Demand

The price elasticity of demand shows the relationship between the changes in the quantity relative to the price of a commodity. This is calculated by dividing the percentage in quantity demanded with the percentage change in price (Goodwin et al., 2018).

Step 1: % Change in Quantity Demanded
= [(8000-6500)/8000]*100
= [1500/8000]*100
= 18.75%
Step 2: % Change in Quantity Demanded
= [(3-2)/2]*100
= [1/2]*100
= 50%
Step 3: Price Elasticity of Demand
= 18.75/50
= 0.375

B. Less Elastic Demand or Relatively Inelastic

The demand has decreased in the small proportion and is noted at 0.375 which is lesser than one; therefore, the demand is relatively inelastic. The relatively inelastic demand concept states that the lower change in the quantity demanded as compared to the price change (Santerre and Neun, 2012). This is also considered as less elastic or inelastic demand, wherein the changes in quantity are lesser than the changes in price. In the above example, the price has changed by 50%, while the quantity has only changed by 18.75%, which shows that the elasticity of demand is relatively inelastic or less elastic.

Section B: Macroeconomics
Section 1: General Introduction
Section 1.1 Economics:

According to the views of Gillespie (2011), the term economics refers to the study of methods, which are beneficial to organise money, industry or trade activities in a society. Economics deals with the production, distribution as well as consumption of wealth with the problems related to labour, and finance of the country.

Section 1.2: Scarcity and choice:

Scarcity and choice are considered as two major problems in economics. Scarcity refers to the term in, which there is a shortage of the supply of good and materials for the people, whereas choice refers to the term in, which the people produce goods and services in order to fulfil the basic needs of the consumers (Gillespie, 2011). The requirements of the people are not unlimited, but the resources that are available to fulfil the requirements of the people are limited. Furthermore, the factors, which are used for producing the goods and products are labour, capital, and equipment. These factors are directly dependent on the available resources, which are limited to utilise (Baumol and Blinder, 2015).

Section 1.3: The price mechanism:

The price mechanism is the system in, which the demand and supply forces of the consumers determine the costs of the goods and products that are produced. The price mechanism has its impact on both the buyers as well as the sellers in the market due to, which the decisions related to the economy are taken by considering price mechanism. Moreover, the price mechanism system would also be beneficial in explaining the ways in, which the free market economy distributes the resources as well as helps in analysing the prices of the products and services developed in the industry (Meade, 2013).

Section 2: Pure Market Economy

Section 2.1 Introduction:

Hummel and Stringham (2010) argued that the pure market economy has been determined as an economic system which depends heavily on markets for assigning resources as well as for addressing all queries regarding their allocation. In the pure market economy, the markets are used by buyers as well as the sellers in order to sell or exchange the products and services. In these types of economies, the potential markets are utilised by sellers as well as buyers for willingly exchanging services, goods as well as resources (Hummel and Stringham, 2010).

Section 2.2 Dealing of Pure Market Economy potentially with Scarcity as well as Choice:

The problem of resource scarcity is dealt by the private businesses themselves in the pure market economy with own capabilities and financial efficiency. Further, the following roles in resource allocations:

How to Produce: The private businesses groups or individual decide on who and how will be the production of potential goods take place.

No involvement of government and legal policies of anti-discrimination and equal employment is observed in this choice (Moyher, 2017).

What to produce: In economies of the pure market, the private business group decide by themselves regarding the goods that are to be produced. The business people themselves play the role of making decisions on categories of goods that are to be produced without any anti-monopoly and anti-trust laws of government (Moyher, 2017; Johansson, Karlsson and Westin, 2012).

For whom to produce: After production of goods, the highest bidders are selected for selling the goods who can pay highest prices with no concern and interference of government (Johansson, Karlsson and Westin, 2012; Moyher, 2017).

Section 2.3 Price Mechanism under the Pure Market Economy

As per Meyer and Ahlert (2019), the price mechanism, potentially in the pure market economy, works based on price elasticity which generates according to fluctuation in the goods’ demands. As the demand for goods gets raised in this type of market, the price rate also tends to get increased simultaneously. Moreover, while the demand gets decreased, the price rate also gets decreased so as to increase the sales anyhow by creating a sense of cost reduction. In addition to this, the price mechanism in the pure market economy also helps in organising the production of products and goods. Further, the price mechanism would also help in distributing the developed goods in the market, which would further help in enhancing the economy of the country. The price mechanism would also help in resolving the issues related to the production of the goods and services as well as helps in defining the quantity of the products to be developed (Meyer and Ahlert, 2019).

Section 3: Centrally Planned Economy

Section 3.1 Introduction

Hare (2013) reviewed that a Centrally Planned Economy (CPE) is an economic system where the state of the government plays a chief role in making economic decisions. The involvement of the customers and business enterprises is not identified in the decision-making process in a CPE. The business enterprise owned by the state is responsible for undertaking the production of demanded commodities and services (Hare, 2013).

Section 3.2: How a Centrally Planned Economy Deals with Scarcity and Choice

Hall and Lieberman (2012) argued that in a CPE, the scenario of scarcity is dealt with the help of resource allocations by the government.

Resources allocation by the government plays a key role in identifying the demands of the individuals residing in a given region by considering the equity levels. The government allocates limited resources in the regions that are facing scarcity by means of non-pricing mechanisms like queuing and rationing coupons. The suppliers and customers do not have a choice over accessing the respective commodity. The power of choice vests with the state-held enterprises, which allocate resources on an equal basis by determining the demands (Hall and Lieberman, 2012).

Section 3.3 Price Mechanism under a Centrally Planned Economy

According to Edwards, Crain and Kalleberg (2011), under a CPE, the government plays a key role in defining the pricing mechanism and governing the market interference through price controls. The examples of price controls are price ceiling and price floors among, which the minimum prices that are set by the government for the products and goods in the market can be termed as price floors. Further, the maximum prices of the products and goods that are set by the government for the consumers is known as price ceilings (McEachern, 2011). The state-held business organisations compete with market inequities by issuing taxation and subsidies. Governments also interfere with the markets by means of maximising social well-being. Government is involved in breaking the monopolies and promoting national unity. In a CPE, the government also intervenes the market for reducing the damages arising from natural economic scenarios like inflation and recession (Edwards, Crain and Kalleberg, 2011; Kalirajan and Bhide, 2017).

## References

Arnold, R. A. 2008. Macroeconomic. Boston: Cengage Learning.
Baumol, W. and Blinder, A. 2015. Economics: Principles and Policy. Boston: Cengage Learning.
Edwards, J., Crain, M. and Kalleberg, A. 2011. Ending Poverty in America: How to Restore the American Dream. The New Press.
Gans, L., King, S. and Mankiw, N. G. 2011. Principles of Macroeconomics. Boston: Cengage Learning.
Gillespie, A. 2011. Foundations of Economics. London: Oxford University Press.
Goodwin, N., Harris, J.M., Nelson, J.A., Rajkarnikar, P. J., Roach, B. and Torras, M. 2018. Macroeconomics in context. Abingdon: Routledge.
Hall, R.E. and Lieberman, M. 2012. Economics: Principles and Applications. Cengage Learning.
Hare, P. G. 2013. Central Planning. Routledge.
Hummel, J.R. and Stringham, E.P. 2010. If a Pure Market Economy Is so Good, Why doesn’t It exIst the Importance of changing Preferences versus Incentives in social change. Quarterly Journal of Austrian Economics 13, p. 31.
Johansson, B., Karlsson, C. and Westin, L. 2012. Patterns of a network economy. Springer Science & Business Media.
Kalirajan, K. and Bhide, S. 2017. A disequilibrium macroeconometric model for the Indian economy. Routledge.
McEachern, W.A. 2011. Economics: A contemporary introduction. Boston: Cengage Learning.
Meade, J.E. 2013. Planning and the Price Mechanism (Routledge Revivals): The Liberal-Socialist Solution. London: Routledge.
Meyer, B. and Ahlert, G. 2019. Imperfect markets and the properties of macro-economic-environmental models as tools for policy evaluation. Ecological Economics 155, pp. 80-87.
Moyher, A. 2017. What Is a Pure Market System of Economics?. [Online]. Available at: https://bizfluent.com/13639139/what-is-a-pure-market-system-of-economics [Accessed on: 12 February 2019].
Santerre, R.E. and Neun, S.P. 2012. Health economics: Theory, insights, and industry studies. Boston: Cengage Learning.
Schneider, E. 2013. Pricing and equilibrium. Abingdon:Routledge.

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