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Demand & Supply Analysis and Choice of Economic System - Essay Example

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The paper sought to explain why in practice most countries adopted some form of the mixed economy in allocating resources even though the free market economy functions automatically. A mixed economy is an economic system in which many private companies and a strong public sector coexist…
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Demand & Supply Analysis and Choice of Economic System
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Download file to see previous pages This essay discusses that a free market economy is a market system where transactions between buyers and sellers are determined only by mutual consent. This excludes that one party gets the deal by duress or deception; it also excludes the intervention of a third party – like government – to force or prevent the market. A free market limits government intervention in the application property rights, contract enforcement and verification of consent. The market economy means an economic system where decisions of production, exchange and allocation of goods and services is mainly determined using information derived from the free interaction of supply and demand established by market forces. There are several limitations of market economic system to be implemented in economy. A free market can occasionally result in formation of monopoly, duopoly, oligopoly or a cartel. Such structures create dominance of suppliers in the particular market to the disadvantage of buyers. For this reason, free market economy can potentially impinge on the rights of a certain segment in the economy. A fair exchange implies a relationship of equality between the persons concerned, which is absent in these scenarios. Sometimes, in a market economy the employer and the employee are not in a relationship of equality. The employer can attempt to dictate terms to the employees, therefore, a safeguarding body is required to ensure payment of minimum wages and to enforce health & safety measures. Provision of Public Goods A free market economy cannot provide provision of pubic goods whose benefits are distributed over a very large population and cannot be directly traced. For instance, roads and national defense cannot be provided by a private enterprise. Therefore, some intervention is needed in the market economic system for these provisions (Grossman, 2005). Provisions for Safety Net A free market economy cannot provide social security to the citizens of the country. A market economic system cannot find mechanism to transfer funds from have’s to havenot’s and to help citizens in the lower income groups to rise from the vicious cycle of lower economic strata. State invention is essential for redistribution of wealth and income for functioning of a healthy society. Mixed Economic System A mixed economy is an economic system in which many private companies and a strong public sector coexist. In other words it is a mixture of ideas of the market economy and planned economy. The reason some form of a mixed economic system in in place in almost all countries of the world is that mixed economic system fulfills the above mentioned shortcomings of a free market economy. A government can promote free enterprise while reserving certain areas of the economy through nationalization , or then it privatize all enterprises while creating a legal framework which limits actions which impinges on the rights of certain segment of the economy. Most countries today have a mixed economic system to a certain level. Question 2 – Demand & Supply Changes in Metal and Automobile Markets 2.1 - Impact on the Prices of Palladium Metal following Usage of Replacement Metals it is found that the alternative metals will replace palladium in the process of production of an automobile. This implies a leftward shift in the aggregate demand curve for palladium metal because less palladium will be demanded at each price level. This shift is depicted in the graph below by the movement of demand curve from D1 to D2. Since, the supply of palladium is dependent on the rate at which the metal is extracted from the ores, there is not change in the aggregate supply of the metal (Grossman, 2005). The aggregate supply ...Download file to see next pagesRead More
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