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How Markets Functions - Essay Example

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In a free market economy there is interaction of demand and supply forces to bring about equilibrium in the in the market. The paper will attempt to highlight economic systems; forces of demand and supply; economic issues in the wall street journal and finally a brief conclusion…
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How Markets Functions
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How Markets Functions

Download file to see previous pages... The paper has examined how market functions depending on the structure it adopts. Scarcity is a state where wants exceeds available resources while an opportunity cost is the foregone alternative that is actually the cost of what is chosen. An allocative efficiency is a situation where resources are utilized without waste. Cost-benefit analysis is where resources are selected on basis benefit as weighed against costs. A resource is any asset that will satisfy human wants. An economic problem arises due to availability of insufficient resources to satisfy all unlimited human needs. The challenge then is how to establish products and to allocate the factors of production of land, labor capital and entrepreneurship to attain maximum production, when is to produce and for whom. This scarcity necessitates the need for consumers to make a choice to satisfy their demand due to their limited incomes. Different economic models place choice in various economic systems. The figure below offers a typical example of an opportunity cost. Assuming that a country produces only two goods, A and B, it has to make a choice in the allocation of resources to attain maximum production efficiency and to achieve maximum utility.
Different economic models place choice in various economic systems. The figure below offers a typical example of an opportunity cost. Assuming that a country produces only two goods, A and B, it has to make a choice in the allocation of resources to attain maximum production efficiency and to achieve maximum utility. Fig 1 Production Possibility Frontier (ppf) Possibility Frontier (ppf) Capital Goods A M E A K 0 N B Consumer goods Consumer goods The curve AB can be attained if the resources employed in production are efficiently utilized with the existing state of technology. Suppose country X decides to produce only two goods: Capital goods and consumer goods as shown on the ppf AB. If it decides to produce (OA) units of A, it will have zero OB units of A. Thus OA goods are the opportunity cost of OB goods. Occasionally, country X will allocate resources to produce little of OA and OB to maximize utility as depicted at E. In real life situations, people will have to make choices between two competing alternatives. For instance, students making choices on either continuing with studies or earning, consumers to choose good A at the expense of good B or vice versa. One alternative becomes an opportunity cost for the other. Various Economic Systems Economic systems are mechanisms through which an economy works. For instance, there is socialism in which policies regarding allocation, production and distribution are left in the hand of producers and government. Others are capitalism, communism and mixed economy which functions differently. Goals of Microeconomics Micro-economics analyzes market failure, describes theoretical conditions related to perfect conditions and how these anomalies can be corrected. The theory of demand and supply ...Download file to see next pagesRead More
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