Solving The Problem How To Produce Economics Essay

Solving The Problem How To Produce Economics EssayIntroductionEconomic is the study of how people satisfy their secular needs and wants with the available resources. The primary focuses of scotchs be distinguished between needs wants, fundamental economic puzzles.Needs means something we have to have, ex foods, water, clothes. Wants are something we like to have. To originate these things participation will face various problems. What to pay off, how frequently to produce, how to produce, for whom to produce, when to produce. Basic economic problems are simply because wants are unlimited resources are limited.Resources weed be mainly divided into two, natural economic. So we have to make choices to select wants needs. Its means unlimited wants limited resources force us to make choices. rating of the total (life cycle) costs of alternative solutions to the problem of meeting the requirements of a ill-tempered client and choice of the best solution.ANSWERSQ1Q1.1.Market EconomyAn economic system in which economic decisions and the pricing of corrects and servicesare guided solely by the aggregate interactions of a countrys citizens and businesses and there is little government intervention or cardinal provision. This is the mated of a centr altogethery syllabusned economy,in whichgovernment decisionsdrive most aspects of a countrys economic activity.The main co- coordinating device is the monetary value headstrong in the grocery place through the interaction between take aim and provide. Hence this also called free market system because the scathe is the main device that solves all basic economic problems. This is called price system.It is said that in a market economy, there is an invisible hand operating due to (a) economy is operated by the price system, (b) buyers and sellers respond to price system and accordingly both parties get coordinated, (c) basic economic problems are solved using the price system. In a market economy the basi c economic problems are solved and resources are allocated in the following manner.Solving the problem what to produce in which quantityIn a market economy this problem is addressed by the private sector entrepreneurs through the decisions made by them. Since they always have the profit motive the commodity and factor prices are considered in decision making. Consumers will puddle demand in the market by revealing their choice by purchasing goods. Suppliers create the lend force having considered the commodity price, cost and profit. Accordingly they will allocate more resources to produce more of goods with higher profits.Solving the problem how to produceThis problem is concerned with the selection of labor method by referring to the factor market. Since the private sector is concerned with profits they will select the most cost impelling production method. Hence the factor with the lowest price will be applied more in the production in order to minimize the production cost.S olving the problem whom to produceThis problem stresses how the economys total product gets distributed among people. This is decided by the distribution of income among people. Income distribution is determined by 2 factors which are (a) how much of factors are owned by the fellowship units, (b) the price of such(prenominal) factors.In the market economies individuals can own resources without being subjected to any limitations. The resource ownership is decided by factors such as merits, skills, inheritance and entrepreneurship. Factor price is decided by the demand and supply of the factors. Therefore this problem is solved by the performance of the factor market.Command economyIn ascendency or planned economies, questions on resource allocation are decided by a central authority often the government or a state controlled council. However since centralized decisions require plans set in advance for the desired outcome, these economies are called centrally planned economies. I n these economies, economic activities such as what to produce and how much to produce take place as per the commands of the central planners.E.g. Cuba, North KoreaIn command economies the basic economic problems are solved and resource allocation is done based on a preset plan. This plan is a descriptive story that illustrates resources, operation of production activities, and distribution of income among households etc. with a view of achieving a set of selected objectives.Solving the problem what to produce in which quantityIt is the central planning authority that decides the resource allocation between consumer and investment goods.Solving the problem of how to produceIt is the central planning authority that decides the production method and they set the plan to match inputs.Solving the problem for whom to produceThis is concerned with the distribution of income among household units. The only factor that is owned by households is labour. The only means of income available to the household units is salaries and wages. A disparity in income distribution arises to a certain extent due to the differences in quality of labour. Further the quantity of goods and services the households get does non depend solely on their income because government also supplies goods and services at subsidized prices or free of charge.Q.1.2.(a) Market residual price Rs.51(b) Market residuum quantity 490 unitsQ.1.3.Effect of evaluateesThe government imposes assesses on production or sale of commodities which are called indirect evaluatees. The indirect tax can be either a unit tax or an advoleram tax. If the government imposes an indirect tax on a commodity, it will shift the supply curve leftward by the amount of tax (i.e if it is a unit tax, the supply curve will shift leftward by the amount of unit tax as supplier is supposed to pay the tax to the government). The resolution of taxation will be that it augments the net cost of supplying a particular commodity. Ther efore every quantity will be supplied at a higher price than earlier or in other words the quantity supplied at each(prenominal) price will be lesser than earlier.Figure 2 depicts the incidence of an indirect tax.PriceS2S1CACP2BEP1Qty DP00Q2Q1Incidence of tax on the buyersFigure 2Incidence of a tax on the sellersThe division of the tax burden between the buyers and sellers depends on the elasticity of supply and demand. Given the demand conditions, the greater the elasticity of supply, and the greater the incidence of tax resting on the buyers of a commodity. On the other hand the greater the elasticity of demand, and greater the incidence of tax resting on the sellers of a commodity. Figure 2 represents the case of a commodity with relatively elastic supply.When the tax levied on this commodity, the supply curve shifts leftward from S1 to S2, the prices rise from P1 to P2 and the equilibrium quantity reduces from Q1 to Q2. P2 to P0 represents the unit tax. The price increase from P1 to P2 will be the incidence of tax on the buyers. P1 to P0 represents the burden of taxation (per unit) on the sellers. It should be noticed that in this case of elastic supply curve, the incidence of tax on the buyers is greater than that on the sellers.Imposing a tax on commodity typically increase the price paid by the demanders and decrease the price received by the suppliers. This certainly represents a cost to demanders and suppliers, but from the real cost of the tax is the output that has been reduced. The lost output is the social cost of tax.As per Figure 2, the concepts of consumer and producer surplus can be used to value the social cost of tax. The red in consumers surplus is given by theatre of operationss C+A and areas E+B represent the way out in producer surplus. Thus the total waiver to the consumers and producers of the commodity is the areas C+A+E+B from which C+E is gained by the government as the tax revenue. The rest of the area A+B is known as the Dead Weight Loss of the tax or the excess burden of the tax. Basically, it is the lost value to the consumers and producers due to the reduction in gross sales of the commodity. Therefore the government does not get any revenue on the reduction in sales of the commodity. From the view point of society, it is a pure loss dead weight loss.Effect of SubsidiesSubsidies on production will shift the supply curve to the right until the vertical distance between the two supply curves is equal to the per unit aid. When other factors remain constant, this will decrease the price paid by the consumers and increase the price received by the producers. A subsidy will reduce the net cost of supplying a commodity. Therefore every quantity will be supplied at a lower price than earlier or in other words the quantity supplied at each price will be higher than earlier.Figure 3 depicts the effect of subsidies.Figure 3(b) FV= $100000 r = 12% n = 5 PV= ?PV = FV (1+r)-n= 100000(1+0.12)-5= $56742.69(c)FVA= Rs. 500000 n= 15 r= 7% PMT =? *Payment500000= (1+0.07)15-1)/ 0.07* PaymentPayment = Rs.19897.31 per annumQ2Q2.1 call back that the monopoliser produced one more unit than Qm. The consumer surplus from that unit would be the difference between the demand curve and the price for that unit. Now imagine that the monopolist produced all of the additional units it would take to make the efficient quantity. The area of the blue triangle represents the additional surplus that consumers would get if the market were efficient. In other words, the area of the triangle is the loss in consumer surplus that results from the monopolists under-production. It is the true dead weight loss to the society. Therefore it is evident that monopoly is not good from the view point of the society as a whole.A monopoly will be appropriate in a situation where there is a limited supply of a particular commodity which can be considered as a necessity good where it is required to be offered to the public at a r easonable price. In such situations the government will establish a monopoly. This will ensure that the particular product or service meets the required standards. E.g. Railway in Sri LankaQ.2.3. (a)Labour per daylightOutput per dayMarginal ProductVariable costAverage CostMarginal Cost000015550101021271008.337.1432081507.56.25431112006.454.5454092506.255.5664663006.528.337504350712.585224007.6925(b)(c )Q.3.1SummarizingThere are various types of economic systems practiced in the world. Such as Market economy, centrally planed (Controlled) economy, Mixed economy. from each one system has various types of advantages disadvantages.Demand supply both determine the price of a good. Demand means willingness capacity to pay. Supply is the quantity of goods that businesses willing to produce or sell. In demand supply analysis the concept of equilibrium plays a major role. This is a concept which opposing dynamic forces cancel each other out.When it comes to theory of the firm economic cost can be divided as, explicit, implicit, fixed variable costs.Explicit costs are the monitory payments it makes to those who supply labor services, material, fuel, transport service etc.Firms implicit costs are the opportunity costs of using its employed resources. Fixed costs are not related directly to production rents, rates etc. they can change but not related to output. Variable costs that do change when we produce more more.There are 4 major types of market structures available. Each market consists of different features.The market means any organization where buyers, sellers, particular good are kept enclosed with each other.