Government and the Economy: a Global Perspective - Essay Example

1. This means that those who are directly in contact with the customers do not decide what to produce even though they have the information regarding those goods and services that are high in demand. Due to this lack of information, those on the top level of the economic system may fail to predict what goods are higher in demand and may divert more resources towards goods and services that are less in demand and this may lead to over allocation of resources towards producing those goods and services that are not in demand. If more resources are diverted towards such goods and services, goods and services that are higher in demand will be produced less and thus resulting in an increase in the level of shortage. While those goods that are less in demand and are produced more may be wasted and thus resources that are not abundant in nature may be wasted.
2. The basic rule of demand and supply states that while holding other factors constant, an increase in prices leads to an increase in supply and decrease in demand for goods and services and a decrease in prices leads to increased demand and decreased supply of goods and services. This is because at higher prices, suppliers are able to make higher profits and they are willing to sell more and due to this they increase their supply. But if prices increase, consumers are able to purchase less and they demand less for a product because they have to pay higher prices. On the other hand, if prices decrease, suppliers are less willing to sell as their margins decline and consumers demand more because they are willing to purchase more due to a decrease in prices.

Example demand supply schedule:

Prices

Quantity Supplied

$10

50

$20

75

$30

100

$40

125

Figure one represents a supply schedule stating the different quantities of products supplied at the different price levels. Figure 2 is an illustration of changes in quantity supplied with changes in prices of a product. The rightward sloping curve marked with “S” is the supply curve. On the X-axis is the quantity supplied and the Y-axis represents the quantity demanded. Point S1 shows that when the price of a product was $10, the quantity of product supplied was only 50 and as the price started rising the quantity supplied even started increasing represented by S2, S3, and S4. This graph clearly represents that while holding other factors constant, when the price of good or service increases, the supply of the good or service increase and vice-versa.