Economics Essay

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1a) The basic economic problem is one of scarcity of productive resources . Explain how resources are allocated between competing uses in a market economy . (10)

Scarcity refers to a limited number of resources such as workers, machines, factories, raw materials .

A market economy also known as a free market is one where decisions are made through the market mechanism. The forces of demand and supply, without any government interference, determine how resources are allocated. What to produce is decided upon by the level of profitability for a particular product. Buyers cast their spending votes in the market place.How production should be organized is equally determined by what is most profitable. Firms are encouraged through the market mechanism to adopt the most efficient methods of production. For whom production should take place, production is allocated to those who can afford to pay. Consumers with no money cannot afford to by anything.

There are mainly four factors of production . Land , Labour , Capital and Enterprise .

Demand is the quantity that consumers are willing to buy at a given price. For example, a consumer may be willing to purchase 30 bags of potato chips in the next year if the price is $1 per bag, and may be willing to purchase only 10 bags if the price is $2 per bag.The main determinants of the quantity one is willing to purchase will typically be the price of the good, one's level of income, personal tastes, the price of substitute goods, and the price of complementary goods .

There are normal and inferior goods . Normal goods is when income rises the demand for the product will also rise . As income rises the demand curve for a normal good will shift to the right . An increase in income may cause a small shift to the right in the demand curve for salt but a larger increase in the demand for cinema tickets .

If a product is considered to be inferior , then the demand for the product will fall as income rises and the...
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