Scarcity is a economic problem faced by every economy system in the world. So, what exactly is scarcity? Scarcity is a problem of fulfilling all of our human needs and wants with limited resources available. For example, durian. A fruit that only grows certain times of the year, when consumers demands for durian during a period of time where durians will not grow, scarcity will occur because of the limited durian available to fulfill the consumers wants. There are 4 economy systems in this world which is the market economy, planned economy, mixed economy and the Islamic economy. All of this economy system has their own specific way in solving this economic problem. ( The non-hub story 2010)
In a market economy system which is also called capitalism. Example of a market economy system is the United State of America. The fact that resources are privately owned and the fact that the government will not involve in any decision making, therefore the producer will have to find a solution to solve the scarcity problem faced. The consumers plays a major part to solve this problem, because the consumers will have to decide the type and quantities of goods or services to be produced. For example, the demand for cars and motorcycles has increase. Because of the limited resources to fulfill both needs, the producer will have to come to a decision whether to produce more cars or motorcycle. The producer will then decide based on the profit gained, if the profit gained from selling cars is higher than motorcycles, the producer will produce more cars compared to motorcycle and vice versa. The producers will also follow the price mechanism because this will determine the allocation of scarce resources. ( The non-hub story 2010 )
Not only that, producer can also increase the price of an item to motivate consumer to increase the use of substitutes. Producers can also find new modern technology that utilizes resources better. This technological change will then cause the resources to be used more efficiently or less intensely.
As for command economy also known as socialism or planned economy, this economy is associated with socialist or communist economic system, the government owns all the resources available, so they themselves will have to organize and use the resources intelligently and to the best advantage they could. There’s several ways used by the government to solve the scarcity problem faced. One of them is fixing the amount of good to be produced and the price in where the good is sold. This way, it will set quotas for each individual production unit and the resources producing the goods will be fixed. The income or also called as wealth will then be distributed by state. That is why in command economy, the market price plays a little or no part in informing resource allocation decisions and queuing rations scarce.
Question 2;Part A
Two determinants that affect the price elasticity of supply are as followed. The two determinants are the availability of substitute and time period of analysis. A different price elasticity of supply will occur if any of the 2 determinants changes.
The first determinant is the availability of substitute. The substitute that could be found easily will affect the price elasticity of supply. In economics, if the number of substitute available for a good can be found easily, the price will be more responsive. For example, the production of char kuey teow. Char kuey teow has many substitutes available. Because of that, it can be easily switch to other substitute such as hokkien mee. The number of substitute available makes the price elasticity of supply elastic.
The second determinant is the time period of analysis. The longer the time period of analysis, the quantity will be more responsive to the price change. The sellers will be not be able to change their production decisions to price change if it is in a short period. This is because the seller has to take time to find resources to be used in a good. That is why, in a longer period of time, the seller will be able to find other choices. For example, the supply for fujitsu laptop in a short term period is not very elastic, that’s because the resources can’t be switch to other goods. But, if it’s a long period of time, the seller will be able to find other resources that will move between productions. This will result in a more elastic supply. ( The non-hub story 2010 )
Question 2;Part B
There are many ways for a business to use the concept price elasticity to decide on their pricing strategy. Firstly, they can measure the elasticity of a good to see whether the price of a good will be a elastic, inelastic, unit elastic or in rare cases perfectly inelastic. This can be calculated using the percentage change in quantity demanded divided by percentage change in price.
After calculating, if a business has an elastic demand which also means that the coefficient is more then one but less than infinity. This means that even a little change of price, the quantity demanded will be affected a lot. This way, if the business wants to get more amount of profit, the business will have to lower the price of the good then the quantity demanded will increase because of the responsiveness of change of price. For example, if the price of rice decreases by 7%, the quantity demanded for rice will increase by 20%.
But, if a business has an inelastic demand which also mean that the coefficient is less than one but greater than zero, the consumer will be less responsive to the change of price. This way, to gain maximum revenue, the business must increase the price of the good.
Lastly, if a business encounters a unit elastic demand which also mean that the coefficient is equal to one. There’s no need for the business to neither increase nor decrease the price of the good as the change of price will not affect the quantity demanded as the profit gained will be the same.
Question 3;Part A
Supply means a good that a supplier would supply for the market for a period of time. The law of supply states that the price and quantity supplied has a positive relationship which mean whenever the price increase, the quantity supplied will increase as well.
There are several reasons why supplies will increase. One of them is the cost of making the good. This includes the price of raw material. If the price of raw material is low, this will eventually reduce the cost of making the good. This will then result in an increase of good supplied. For example, if the raw material for a badminton racquet is low, the cost of making the good will be lower, this will then result in an increase of quantity of badminton racquet supplied. This will then cause a shift rightward.
Another reason why supply will increase is because of the change in technology. With modern technology, the cost of production for making a good will decrease while the quantity produce will increase, this will then result in an increase in supply. For example, with modern technology nowadays, cost of production for cars are cheaper therefore the quantity of cars supplied will increase as well. This will then cause a shift rightward.
Not only that, the price obtainable for the good will also affect the supply. If a price obtainable for the good is high, the quantity supplied will be high as well. For example, if there’s an increase of price of pens, the quantity supplied for pens will increase as well. This will then cause a upward movement on the supply curve.
Question 3;Part B
When economist say that price floors and ceilings stifle the rationing function of prices and distort resource allocation. It means that the price floor and ceiling is not controlled, the quantity supplied and quantity demanded are not balance therefore changes to the price must be made to make the quantity supplied and quantity demanded to be balance. The price floor and ceilings corrects all these imbalances. ( The non-hub story 2010 )
Question 5; Part A
Demand refers to the quantity of a good that buyers will want to buy or try to buy at different price level. While quantity demanded refers to the number of units of a good that individuals are willing and able to buy at a particular price during a given time period.
A demand curve looks like a sloping curve. Whenever the price of a good changes, it will cause a movement along the curve. While other determinants such as the price of related goods, the size of households income, tastes and fashion, expectations, weather condition, availability of credit facilities, size and structure of the population and advertisement will cause the demand curve to shift either rightward or leftward.
If a change of the price of the good itself occurs, it will lead to a movement on the graph. For example, if the price of Wilson tennis racquets increases, the quantity demanded of Wilson tennis racquets will decrease. This will cause an upward movement on the demand curve.
While other determinants such as the price of related goods, the size of households income, tastes and fashion, expectations, weather condition, availability of credit facilities, size and structure of the population and advertisement. It will cause the demand curve to either shift leftward or rightward.
For example, if the household income increases, the demand for a good will increase thus the demand curve will shift rightward.
The price of related goods will also cause the demand curse to shift. For example, when the price of apacs racquets decreases, the demand for yonex racquets will decrease. This is because consumers would prefer to get cheaper goods. This will also cause the demand curve for yonex racquet to shift leftward.
The other related goods is call complementary good. For example, when the price of handphone charger increases, the price for handphone will increase as well. This will cause a shift to the demand curve as well. ( The non-hub story 2010 )