Equilibrium Price and Quantity, Economic Systems; Cross-Price Elasticity of Demand (Cped); Iv) Income Elasticity of Demand (Ieod);

Topics: Supply and demand, Consumer theory, Mixed economy Pages: 6 (1481 words) Published: January 24, 2013
Economics Assignment 1
i) Equilibrium price and quantity;
The Equilibrium price is set when the supply and demand meet when the quantity demanded by the customer (market demand) and the quantity that the companies (suppliers) are willing to supply the goods/services. For example if you take a look at this graph you can see that at the cross section, where the lines of supply and demand meet, the equilibrium point is shown. This is the “market clearing price” where supply equals demand. Equilibrium Point;

Equilibrium Point;

Figure 1-Sourced from Bized
Market clearing price is used as a justification to what price they should sell at. This is to help the market be clear of all shortages and surpluses, for instance if there is too much supply from the producers, this will cause a problem for the market as the demand will not be as high. Furthermore another “market clearing price” could be a price which is below the equilibrium price, which can be used to help boost demand. For example if there was an expected forecast of sunshine and heat in the UK, the general public may take precautions to prevent getting skin burn, therefore leading towards an increased demand for means of protection (such as suntan lotion). This could lead to the market facing shortages, due to the high demand, known as being out of equilibrium, however if the markets where able to change the prices around, it could solve the equilibrium situation. A new equilibrium price can be recognised once the manufacturers produce more suntan lotion or more businesses enter the market, in order to balance the supply with the new demand.

ii) Economic systems;
Often governments need to handle their economy and the three basic questions are; * What will be produced with our resources?
* How will these goods be produced?
* For whom will we produce these goods?
An economic system is the way the government answers these questions. The Economic system needs to deal with the relationships between production (supply) and consumption (demand), therefore “what is being produced has to be consumed and what is being consumed has to be produced”. A market is a system where parties trade within another, usually companies and consumers for goods and services using money as the standard of exchange. There are three main categories that economic systems can be placed in; “free-market economy”, “command economy” and a “mixed economy” (athaia.com). “Free-Market economy”; The types of goods/services sold here on this market are not controlled fully by the government. However are based upon what the producers sense will sell best, and is usually based on supply and demand. Furthermore a “completely free market” is a market economy where buyers and sellers are allowed to exchange freely, this excludes state intervention, such as taxes, subsidies, price controls and restrictions. USA is an example of an free market economy as the government has less control of the products that are distributed by companies. “Command Economy”; unlike a free market economy, the economic decisions are more controlled by the government, rather than the businesses themselves. Here all the above questions are answered by the government, as they decide upon what individuals need, for example what is allowed to be sold, how they will be made and where to get the resources from. Cuba is another prime example of a command economy, where government controls majority of goods distributed to the market. Command

Cuba (extremely central economic system)
Cuba (extremely central economic system)
“Mixed Economy”; this economic system has control from the government as well as the marketplace. A mixed economy usually involves producers working closer with the government.


This is a table showing countries and what type of economic system they have. This is a table showing countries and what type of economic...
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