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Information System Used by Market

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Section A
Markets and governments have complementary roles in industrialization. Markets are dealing with the growing economics complexity that came with industrialization. Then, governments have to determine the types of economy. a) Identify the type of economics system and explain the economic characteristics of each. Economic systems are normally distinguished by the extent of government involvement in resource allocation and goods production. There are three major types of economic systems such as free-market economy, command economy, and mixed economy. Many countries have a mixed economy to some extent, meaning they combine aspects of market and planned systems. However, the general trend of economic policy can often allow for categorization into one of the other three systems. Free-market economy

A market economy is closely related to capitalism and free enterprise. The demand for goods defines what is produced, and most businesses are privately owned. Those individuals and firms pursue their own self-interest without any central direction and regulations. They are all motivated by profit, where the buyers and sellers are solely responsible for the choices they make. In addition, free-market gives the absolute power to prices to determine the allocation and distribution of goods and services. These prices, in turn, are fixed by the forces of supply and demand of a respective commodity. Only people with sufficient control over resources, and wealth, in particular have the privilege to purchase goods and services, often priced very highly in a free-market economy.

The prices, which are the only allocating and distributing factor in this economy, place the poor in an unenviable situation who are gradually thrown out of the system without any access to wealth and the basic needs of subsistence. Furthermore, if the demand is short of the supply of a respective commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or service. The role of the government of nation is only limited to controlling the law and order of a country and to ensure that a ‘fair price’ is charged by the sellers. Therefore, it means that, government having no role in administering the price of a commodity, has to see that the prices taken by the sellers is true and commensurate with the price determined by the forces of demand and supply. Command economy

Command economy is also called as planned economy. It is an economy in which a central government planning either directly and indirectly sets output targets, incomes and prices. Government owns most business, decides on the price of goods and how commodities are distributed. For this type of economy, the basic economic question will be solved by the government. Rather than giving individuals the chance to decide what they want or need, the government decides these questions for the country. It is quite difficult for the individual because it is impossible for them to know exactly what the best is for those citizens. Circumstances, rewards, wages and other monetary benefits like bonus are distributed on the basis of the joint rendering of services.

This is how command economy actually eradicates the profit-making at individual levels. It doesn’t help with their workers’ motivation because everyone is given the same amount of goods and the same standard of living. For example, a hard working citizen will not get any benefits from work because they cannot increase their standard of living any greater than it currently is and they will make just as much as a person who exerts little or no effort. Command economy is just opposite to the concept of free-market economy, with respect to the basic money-making approaches. While market economy tends to multiply the wealth of a nation through the gradual process of evolution, command economy system prefers deliberate planning of the entire money-making process for the better results. Actually, such sincere economic planning in the long run proves beneficial to improve the economic conditions of a country.

Mixed economy
There are both public and private sectors working together in hand to ensure the economic growth of the economy. The market determines the price and allocation of resources in some sectors of the economy and the government does in others. Neither the market nor the government completely controls the economy. Many countries have a mixed economy to some degree. For example, China allows private ownership of businesses although it controls production and pricing. The United States government interferes with a purely free market by mandating minimum wages and programs such as social security. To some degree, therefore, both China and the United States are mixed economies. A mixed economy is an economic system that answers the three questions both in the marketplace and in the government. Those questions are: what will be produced with our resources?

How will these goods be produced? And, for whom will we produce these goods? Although the United States government plays a role in our economy, a mixed economy usually involves producers working closer with the government than they do in the United States so the US economic system is still a market economy. The economic system a country has is based on what is best for the country. Government play an important role in this economy such as minimizes the market inefficiencies, provide the public goods, reduce the gap between the poor and rich, and also promote low levels of unemployment and inflation. The government will try to reduce the income inequality by imposing taxes where higher income earner is taxed more than the lower income earner. b) Discuss the costs and benefits if a country moves from command economy towards a free-market economy.

In a command economy, the central government regulates various factors of production. In fact, the government is the final authority to take decisions regarding production, utilization of the finished industrial products and the allocation of the revenues earned from their distribution. Besides, the basic economic problems will be solved by the government. The gap between the rich and the poor is small. In this economy, consumers have no choice but have to accept all the decision made by the government.

The term free market economy means a system where the buyers and sellers are solely responsible for the choices they make. In a way, free market gives the absolute power to prices to determine the allocation and distribution of goods and services. Also, consumers are the ones who would determine and influence the types and quantity of good and services to be produced. In free-market economy, price mechanisms will answer all the demand and supply questions. In cases of demand falling short of the supply of a respective commodity, the price will fall as opposed to a price rise when the supply is scarce to meet the growing demand of a good or service. Free market economy is also characterized by free trade without any tariffs or subsidies imposed by the government.

If a country moves from command economy towards a free-market economy, there will be some changes in the economy. Let’s us discuss the costs and benefits if a country moves from command economy towards a free-market economy.

First, there is more freedom in free-market economy due to lack of government involvement in this economy. Hence, buyers are free to purchase any commodity which they like and in whatever amounts. The seller or the producer of a good can also produce whichever product they want to. Also, the producers can increase the capacity of any individual commodity depend on the forces of the market. Producers are free to undertake the risks and rewards associated with increase in production. There is no state interference in the functioning of the forces of the market.

Next, firms will always be looking to produce something new to get ahead of their competitors. Even though the role of government is limited in free-market economy, one of its jobs is to protect property rights. This will include intellectual property rights through patents. Hence, there are incentives in the free market system for firms to be innovative and produce better quality products. Obviously there is no incentive for the command market to be innovative. As long as they produce the essentials, the command market will be happy. In free-market economy, firms will produce whatever consumers are prepared to buy. Consumer needs are highly satisfied due to highly respond to consumer demand. The consumer is sovereign in the economy. Besides, due to the free enterprise factor, there are no restrictions on what the firms can produce. Therefore, there will be a much larger choice of goods and services in a free market economy compared with a command economy. The command economy will be more concerned with making sure there are enough essential goods to go around rather than allocating resources efficiently between all goods.

A disadvantage of a market economy is that sometimes some of the flow-on effects of profit-seeking economic activity can be harmful to other individuals or groups. In a loosely regulated market economy what may be good or profitable for an individual, company or group of companies may not be good for many others. For example, it can be costly for a producer to minimize the negative environmental effects of his activities. If these negative effects do not immediately affect profits and there is no regulatory requirement to minimize them, then there is no incentive to implement them.

Free market economies, although have been successful in developed economies, will not be so in developing countries and the only recourse for them is the model of the mixed economy or social market economy. The welfare role of the state is retained in a social market economy which cares for the poor. In cases where the poor countries are striving towards a free market economy, there should be certain segments controlled by the state but with prevalence of free enterprise such that efficiency is restored and the country moves towards economic prosperity. Thus, free market economy under centralized political control is the most effective way for these countries.

Apart from that, environment and social goals may be ignored in free-market economy as compared to command economy. As we see, command economy emphasizes more on collective benefits, rather than the requirements of a single individual. Under such circumstances, rewards, wages and other monetary benefits like bonus are distributed on the basis of the joint rendering of services. This is the way command economy actually eradicates the profit-making at individual levels.

Command economy is just opposite to the concept of market economy, with respect to the basic money-making approaches. While market economy tends to multiply the wealth of a nation through the gradual process of evolution, command economic system prefers deliberate planning of the entire money-making process for better results. In fact, such sincere economic planning in the long run proves beneficial to improve the economic conditions of a country. c) What economics problems do you think might arise if all goods and services were provided free to consumers by the state or government? Justify your answer. If all goods and services were provided free to consumers by the state or government, then citizens do not need to work and they will not want to work anymore. Citizens no need to work because there is nothing to sell and nothing to buy as goods and services were provided free. In this case, they will all stay at home and waiting for the free gifts. Hence, this will cause unemployment in some market. Since those citizens do not want to work, the company they worked for will decrease in productivity. Although goods and services were provided free, some markets still have to produce goods so that there are goods to provide for the citizens. Therefore, the market still needs employees in their firms.

Next, if there is nothing for the citizens to work and do, then the household will not earn income. It is because citizens did not provide the factors of production for the firms which enable them to produce the goods and services. Then, country will not get income due to no tax from the citizens. This is because citizens do not want to work and they get no income, so there is no taxes pay on income. Besides, the circular flow of income and output will break too. Household is not spending and there is no revenue for the firms; households do not sell factors of production as they accept anything produced by the firms as goods and services are all free. Hence, the circular flow of income and output will totally break. Apart from that, some companies cannot run as citizens do not work and wait for free gifts. As the companies cannot run, the country will have no income. Then country will have to borrow money from other countries to produce these free goods and services. Thus, the country end up become broke.

Also, devaluation of currency will occur and the country will end up being like Indonesia. Devaluation of currency is a deliberate downward adjustment to a country’s official exchange rate relative to other currencies. Devaluation makes the domestic currency cheaper relative to other currencies. There are two implications of devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. If the country increases the price of imports and stimulating greater demand for domestic products, devaluation may aggravate inflation. Besides, the creditworthiness of the nation may be jeopardized. The country’s ability to secure foreign investment may be affected too. Furthermore, if goods and services were provided free to citizens, they will demand more goods as all goods are free. If demand more than supply, inflation will occur.

This is because the government needs to print more money paper to buy products to provide to the citizens. Citizens get things for free and they no need to work, so the country will not have any exports due to no productivity in the country. If inflation occurs, consumption ratio will increase at early stages of inflation. People will be consuming more because money is more abundant and its value is not lowered yet. Besides, prices of imports will rise if the currency is debased, then its purchasing power in the international market is lower. When there is a high inflation, saving money would mean watching your cash decrease in value day after day, so people tend to spend the cash on something else. Thus, end up lowers national saving. In conclusion, all the above are the economic problems that I think might arise if all goods and services were provided free to consumers by the state or government.

Section B
Examine the economic costs and benefits of the introduction of a minimum wage in a competitive firm.

Figure 1.0 Minimum wage of the labor market
Minimum wage legislation is one of the great civil wrongs perpetrated against the low-skilled who need the opportunities which middle-class workers, future professionals and the self-employed can legally take for granted. What the minimum wage law does to the poor is to deny to them the same freely chosen opportunities others follow for their own well-being. Figure 1.0 illustrates the minimum wage of the labor market. Next, lets us see the economic costs and benefits of the introduction of a minimum wage in a competitive firm. First, a minimum wage gives an unemployed person incentive to take a job because he knows what his minimum pay will be. An unemployed person can compare the money he gets from public assistance and compare it to the minimum wage to determine the financial incentive to taking a job.

Also, the introduction of minimum wage will help to reduce tax burden. For instance, a person making at least minimum wage is not using as many public services as someone on unemployment. An unemployed worker is given welfare, rent assistance and food stamps in many states. With minimum wage, the need for public assistance is lowered and this reduces the tax burden on the community and the state.

Without a minimum wage, it can be tough for small business to do their business budget. Thus with a minimum wage in place, a small business owner knows what he will be expected to pay per hour and he can create new jobs with his company based on this budgeting information.

However, the introduction of minimum wage will decrease the efficiency. For instance, when a government fixes a minimum wage for all the workers, then that amount is often considered to be the maximum by the entrepreneurs. If a worker is very efficient, he will not be paid higher wages than fixed by government. It will thus result in curbing the incentive of the workers and thereby decreasing his efficiency.

When minimum wage is introduced, difficulty may arise in enforcement. If a minimum wage is fixed, then difficulties may arise in its enforcement. If the labor is unemployed, they may agree to work at a wage lower than that fixed by the government.

Furthermore, minimum wage will cause disorganizations in business. If a minimum wage is fixed in sweated trades only and not on the national scale, then there will be flight of capital from the former to the later. This will cause disorganization in the whole business. Another great drawback of fixing the minimum wage is that it can tend to reduce the amount of employment in a country. Hence, unemployment will occur in the country. When minimum wage is fixed, the employers try to increase the prices of the commodities in order to cover their increased labor costs. If the demand for the commodities whose price is raised is elastic, then the total quantity demanded will fall. When the commodities are not disposed of at a profit, some of the firms will close down their businesses; others may reduce the number of the workers. Some of the firms may try to substitute labor saving machines. The result of this will be that there will be greater unemployment in the country.

Section C
a) Discuss the characteristics for each types of market structure:-
* Perfect Competitive Market Structure
* Monopoly Market Structure
* Oligopoly Market Structure
Perfectly Competitive Market
A perfectly competitive market must meet the some of the requirements. First of all, both buyers and sellers are price takers. They are those people who take the market price as given. Normally, households are price takers because they accept the price offered in stores. Within this type of market, the number of firms is large. As the number of firms increases, the effect of firm on the price and quantity in the market declines. Large means that what a firm does has no bearing on what other firms do.

For this market structure, there are no barriers to entry. Barriers sometimes take the form of patents granted to produce a certain good. If new producers can enter and exit easily, existing firms might behave as though there are more firms than there appear to be, because there are more potential competitors. Entry into a market can be deterred by barriers to entry such as high start-up costs, brand loyalty, and government restrictions. Another characteristic is the degree of homogeneity of the product. Differences in quality or other properties means that the products of different firms are not perfect substitutes for each other, and customers will absorb some price differences among firms.

Furthermore, there is complete information for this structure. Each participant has all of the information necessary to make the ‘correct’ choices. Firms and consumers know all there is to know about the market such as prices, products, and available technology. Any technological advancement would be instantly known to all in the market. Lastly, firms are profit maximizes. The goal will be making profit and product at the maximum level. For perfectly competitive, owners will only receive profit as compensation not salaries.

Monopoly Market
Monopoly market is one of the structure that only one producer or seller for a product. It means that, the business will be the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. In addition, as the single seller of a unique good with no close substitutes, a monopoly has no competition.

There are some characteristics for monopoly. The first characteristic is the single seller. First and foremost, a monopoly will always be monopoly because it is the only seller in the market. He or she will purchase all the output. Normally, the firm and industry are identical. The word ‘monopoly’ actually translates as ‘one seller’. As the only seller, a monopoly controls the supply-side of the market completely. If anyone wants to buy the good, they must purchase it from the only monopoly. A prime source of monopoly power is the control of resources that are critical to the production of a final good.

Monopoly market sells no close substitutes product. It achieves single-seller status because the good supplied is unique which is characterized by declining costs over a relatively large range of production. There are no close substitutes available for the good produced by a monopoly because a lack of economic competition for the goods and services were occurred.

Besides, they also face the problem about the barriers to entry. Normally, monopoly often acquires and generally maintains single seller status due to restrictions on the entry of other firms into the market. There are some effective barriers to entry which impedes the ability of other firms to begin a new business in an industry in which existing firms are earning positive economic profits. There are a few types of barriers legal barriers (such as patents, prevent others from entering the market), sociological barriers (entry is prevented by custom or tradition), natural barriers (firm has a unique ability to produce what other firms cannot duplicate) and the technological barriers (size of the market can support only one firm).

In addition, there is complete information. A monopoly often possesses information not available to others. This specialized information comes in the form of legally-established patents, copyrights or trademarks. Lastly, firms are all profit maximizes. The goal of all firms will only be profit. They will product at the maximum level where MR=MC. Oligopoly Market

It is a market structure that characterized by a small number of relatively large firms that dominate an industry. The three most important characteristics of oligopoly are an industry dominated by a small number of large firms, firms sell either identical or differentiated products, and the industry has significant barriers to entry. An oligopolistic industry is dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the firms.

Some oligopoly industry produce identical products, while others produce different product. Identical product oligopolies tend to process raw materials or intermediate goods that are used as inputs by others. Firms in an oligopoly industry achieve and retain market control through barriers to entry. For examples, patents, resource ownership, government franchises, start-up cost and etc. Each of these makes it extremely difficult, if not impossible, for potential firms to enter an industry.

b) Suppose that a perfectly competitive industry became a monopoly, what changes would you expect to see in:
* The price of industry’s good
* The output of industry’s good

Perfect competitive industry is a market structure where there is a perfect degree of competition and single price prevails. In competitive market, both buyers and sellers are price takers. A price taker is a firm or individual who takes the market price as given. A perfectly competitive industry contains a large number of firms. Besides, it is relatively no barriers to enter or exit as a business in a perfectly competitive market. This market has the degree of homogeneity of the product. The firms in a perfectly competitive market produce and sell homogeneous products. Also, there is complete information about the market like prices, products and available technology. Lastly, the goal of all firms in a perfectly competitive market is profit and only profit.

Thus, firms maximize profit. A monopoly is a market structure in which there is a single supplier of a product. Monopolies exist because of barriers to entry into a market that prevent competition. For instance, SESCO and Water Board are the examples of the monopoly market. In a monopoly, there is one seller of the monopolized good who produces all the output. The firm and industry are identical. Besides, monopolies sell no close substitutes product. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits. There are effective barriers to entry in monopoly. There are four types of barriers such as legal barriers, sociological barriers, natural barriers and technological barriers. There is complete information in monopoly too. The goal of all firms in a monopoly market is only profit. Firm will product at the maximum level where MR=MC.

Price MC

Pc MRc=Pc=DDc=ARc

0 Qm Qc MRm Pm=DDm=ARm Figure 1.1
The figure 1.1 illustrates how a perfectly competitive industry changes to a monopoly. When marginal revenue equals to marginal cost (MC=MRc), the equilibrium is at point Ec for perfectly competitive market. When market revenue equals to marginal cost (MC=MRm), the equilibrium is at point Em for monopoly. If a perfectly competitive industry became monopoly, the price of industry’s good will increase, whereas the output of industry’s good will decrease. (Pm=price of monopoly, Pc=price of perfectly competitive market, Qm=quantity for monopoly, Qc=quantity for perfectly competitive market).


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