Introduction to Basic Economics - Essay Example

?Running head: Introduction to Economics Introduction to Economics Insert Insert Grade Insert 8 March Introduction to Economics Introduction The mixed economy is an economic system that basically relies on both governments and free markets to allocate resources to the whole economy. The mixed economy is more or less used by every country in the real world, irrespective of their capitalism, communism, or socialism designation. However, theoretically, countries may be said to use free markets or governments exclusively to allocate resources throughout the economy, though not realistic and neither has any economy succeeded in using one of such means exclusively. All economies in the real world depend on a mixture of both governments and markets to allocation resources efficiently. According to markets, resources are allocated through voluntary choices that are made by all participants in the economy and individuals. On the other hand, governments allocate resources involuntarily and enforce laws, taxation systems, regulations, and restrictions to participants. Question 1 Market and Government Economies Countries may have preferences between the using of governments or markets in allocating resources within their economies; however, it is evident that both markets and governments play an important role in mixed economies. Markets generally involve exchange of goods and services in a manner that is voluntary, since no force used to compel any economic participant in buying or selling items of economic value. A market basically thrives on participants’ willingness and desire to exchange. Pure market economies exclusively use markets to allocate and distribute resources throughout the economy. Government economies rely on involuntary enforcement to allocate resources through setting of rules and laws to govern a resource allocation system. The rules and laws are mandatory for participants in the economy, and the government has the right to enforce the laws and punish participants who fail to agree with the generally accepted rules and regulations. Participants in the economy follow resource allocation rules and regulations because the government and relevant authorities enforce them. Pure command economies use governments exclusively to allocate resources in their economies. However, such kind of economies precludes theoretical extremes, since they do not actually exist and are not realistic with regards to the real world situation. Both pure market and pure command economies provide a benchmark to facilitate real world economic aspects comparison. Mixed economies are therefore evident in the real world, since both pure market and pure command economies preclude non-existent theoretical ideals, leaving the real world economies somewhere in between the two theoretical ideals. Although the theoretical ideals are non-existent in the real world, their collective contributions are evident in mixed kind of economies. It is important to note that, although mixed economies use both markets and governments to allocate resources, real world mixed economies use more of governments or markets, in accordance to the systems they use. This alludes to economies such as capitalism, which is an economic system that is market oriented, as it uses more of market than government in allocating resources. Similarly, communism and socialism are mixed economies that use more of governments than markets to allocate resources (Greene, 2007, p.46). Mixed economies use government policies, rules, and regulations as an inherent dimension used to pursue economic goals in allocation of resources. Economic goals pursued encompass societal desires such as the need to achieve full employment, equity, stability of the economy, economic efficiency, and sustainable growth. Through economic policies, governments assume the primary responsibility of pursuing economic goals desired by the economy through assisting, controlling, guiding, and regulating the voluntary market. Government policies are undertaken in form of executive decisions, regulatory laws, authoritative body administrative actions, and government agency rules. Mixed economies have enabled many countries to significantly reduce income inequality with regards to increased government expenditure on public utilities, thus providing economic benefits to low income individuals and the economy in general. Countries like India have adopted the mixed economy system where basic industries such as defense, railways, atomic energy, post, and telegraph have been placed in the public sector. On the other hand, industries dealing with consumer goods have been prudently left to the private sector. Such strategies reflect welfare concerns that seek to give the government authority to nationalize vital industries or those that are of public interest. Generally, Mixed economy systems present a wide range of advantages such as rapid economic development, equity, balanced regional growth, freedom to private ownership, enhancement of public interest, and planned developments among others. Due to collaboration of both the public and private sector, economic resources tend to be used more efficiently while minimizing waste, thus stimulating rapid growth and development of the economy. More so, individuals are free to retain and acquire property in their own names, thus motivating them to work harder and acquire more. This helps to stimulate growth and rapid development in the economy through vibrant fields such as agriculture. The public sector also functions to reduce income inequality and provide economic benefits to all individuals, thus negating the tendency of isolated individuals to grow extremely rich through the law of inheritance and right to property ownership. More so, the public sector focuses on fulfilling the public’s interest and welfare through public facilities and schemes such as social insurance, alongside managing and incurring expenditure on public welfare aspects. Balanced regional growth is also achieved through government’s planning commissions, which enact policies to stimulate equal development of all regions within the economy. Planning commissions have also been empowered in such economies to make premeditated and effective plans to stimulate economic development (Jain & Ohri, 2010, p.13). Question 2 Forces of Demand and Supply Question 2.1 Palladium prices fell with the news of development of technology that allowed car manufacturers to cut the use of expensive metals, while maintaining performance. These developments implied decreased demand of Palladium, which was consequently stimulated by the growing need for manufacturers to reduce costs of production. According the forces of supply and demand, the decreased demand due to non-price influences precludes a shift in demand, which consequently reduces prices. Fall in price of Palladium represents a leftward shift in demand curve as a result of significant reduction in its demand by carmakers. A shift in the demand curve is experienced when there is a variation in any non-price demand determinant that results in completely new and different demand curve. Non-price demand determinants are basically the factors that would cause a change in demand irrespective of whether prices change or remain the same. They are the aspects whose alteration may compel the consumer to purchase less or more of the product, even when the price of the product remained constant. Other than non-price determinants, demand-influencing factors further encompass other aspects such as income, expectations, and population, complement, and substitute products. Demand is the ability and willingness of consumers to buy a product under circumstances prevailing, thus any factor that impacts on willingness and ability of consumers to purchase a product is termed as a non-price demand determinant (McEachern, 2009, p.84). The development of a new technology that allows car manufacturers to cut the use of expensive metals is a non-price demand determinant that has caused the shift of demand curve towards the left. Shift of demand curve towards the left consequently compels suppliers of the products to reduce prices according to the forces of demand and supply. This explains the fall in the price of Palladium after the announcement of the technology breakthrough in the production of catalyst for cars. During this time, car manufacturers were seeking to cut their costs on manufacturing materials, considering the skyrocketing of world commodity prices due to demand surges. In addition, Tata, the Indian group has exerted pressure on Japanese vehicle manufacturers to further reduce costs of production with their $2,500 vehicle plan. Extreme desire by car manufacturers to reduce their costs of production has significantly influenced shift in demand curve, which further explains the fall in Palladium prices. The diagram below shows a shift in demand curve from D3 to D2, thus causing fall in price of Palladium prices from P3 to P1. Source: unlearningeconomics.wordpress.com Question 2.2 Technological breakthroughs would go a long way in helping Mazda and Nissan car manufacturers to reduce their cost of production, while maintaining performance. Technology breakthroughs that help in reducing the use of precious metals in catalysts would help to reduce the costs spent in purchasing the precious metals. More so, the technology breakthroughs would facilitate significant reduction in demand, which would consequently lead to price reduction. Although cost of purchasing precious metals used in catalyst would be significantly reduced with regards to technology breakthrough, price reduction of these precious metals would further enable cost cutting, since costs of purchasing the little amount of metal would be saved. Generally, technology breakthroughs would help Mazda and Nissan carmakers to massively reduce their costs of manufacturing vehicles, thus giving them competitive advantage over low cost producers such as the Tata Group, which produced the $2,500 car in 2007/08. The shift of demand curve AD’ to AD as shown in the diagram below leads to lower price for commodities in question, thus enabling buyers to save on purchasing costs as in the case of Nissan and Mazda vehicle manufacturers. Source: Ippolito 2005. p.129 However, from non-price demand determinants, other contributing factors such as the strength of the economy determine the extent to which aggregate demand shift affects prices. In a case where an economy is in a crisis, a decrease in product demand will lead to more decrease in prices than the product output, while in an economic boom, similar decrease will affect price to decrease less. Question 3 Non-adoption of new technology in the car industry would basically render demand of precious metals and other manufacturing materials constant. Constant demand would translate to rather constant prices, although slight increases in prices may be experienced due to dwindling supplies and economic prospects. Car manufacturers would be unable to reduce their costs of production and they may be driven out business in the long run by competitors such as Tata Group who recorded a $2,500 low-cost car production. Reference List Greene, C.L., 2007. Entrepreneurship: Ideas in Action. Cengage Learning. Ippolito, R.A., 2005. Economics for Lawyers. Princeton University Press. Jain, T.R. & Ohri, V.K., 2010. Principles of Microeconomics. FK Publications. McEachern, W.A., 2012. Economics: A Contemporary Introduction. Cengage Learning. Read More