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Part A Question 1

Scarcity is a fundamental problem faced by all economies because there are not enough resources such as land, labour capital and entreneurship available to produce all the goods and services that people would like to consume. Lipsey and Chrystal (2007). Scarcity is the excess of human wants over what can actually be produced. Because of scarcity various choices have to be made between alternatives. Sloman (2004, pp.5) The issue of all societies are the allocation of scarce resources to satisfy human wants, basic questions are asked such as what product to produce?, how to produce?, and for whom to produce?, to resolve this issue. All societies must answer all these questions, in answering these questions different societies use different allocative mechanism. There are different types of economic or market system for allocating resources these includes the Pure Market economy, Command economy and Mixed economy. Pure market economy: The market alone is used to allocate scarce resources of land, labour and capital. Prices are determined on the market act as a signal to producers and consumers, bringing supply and demand into balance. See figure below on the equilibrium price and quantity

Price

_______________________________________ Quantity supplied and demanded per time period

There is no direct role for government in resource allocation, their main task is to provide infrastructure needed to allow markets to work through regulations. (Griffiths& Wall 2008) The strength of this type of economy is where the market co-ordinate through it prices the activities of millions of buyers and sellers without any need for an expensive bureaucracy of decision makers. (Griffiths & Wall ibid.) The weakness is that market failures could result in a misallocation of resources through externalities, imperfect information, monopoly power and public good. (Griffiths & Wall ibid ) The pure command economy is usually associated with a socialist or communist economic system where land and capital are collectively owned. The state plans the allocation of resources. Sloman (2004,pp.22) Planned economies still exist in some parts of the world, most notably in Cuba and some states in Africa. http://www.bized.co.uk/learn/economics/notes/systems.htm Pure command economy: Government, not markets allocate scarce resources of land, labour and capital. Comprehensive plans are drawn up to decide which products are to be produced and in what quantities. Prices are determined by governments. Government retain ownership of the means of production little or no private ownership. (Griffiths & Wall ibid) The advantages of this economy: With central planning the government can take an overall view of the economy. It can direct the nations resources in accordance with specific national goals. Sloman (2004, pp.22) Production and consumption can be based on social rather than private needs and wants. (Griffiths & Wall ibid)

The disadvantages: Where the state has control over resource allocation which would involve a considerable loss of individual liberty. Sloman (2004, pp.22) There would be expensive bureaucracy needed to allocate resources, inappropriate decisions made by the administrators, resulting in excess supply for unwanted products or excess demand for wanted products. . (Griffiths & Wall ibid Mixed Economy: Uses both markets and government intervention to allocate scarce resources of land, labour and capital. Government interventions can be direct by nationalising industries or indirect through regulations and tax policies. . (Griffiths & Wall ibid) The strength: Government could offset various types of market failure. The weakness: High taxes may be needed to provide the revenue to assist government intervention. . (Griffiths & Wall ibid) A favourable investment climate will be encourage within a market system as there would be minimal government intervention hence less bureaucracy and the market forces such as supply and demand will determine what is best for the economy.

BIBLIOGRAPHY

Griffiths, A. and Wall,S. (2008) Economics for Business and Management 2nd ed. Gosport: Pearson Education Ltd Lipsey, G.R and Chrystal A. k (2007) Economics 11t ed. China: Oxford University Press. Sloman, J. (2004) Essentials of Economics. 3rd ed. Gosport: Pearson Education http://www.bized.co.uk/learn/economics/notes/systems.htm

Reference List Griffiths, A. and Wall,S. (2008) Economics for Business and Management 2nd ed. Gosport: Pearson Education Ltd Lipsey, G.R and Chrystal A. k (2007) Economics 11t ed. China: Oxford University Press. Sloman, J. (2004) Essentials of Economics. 3rd ed. Gosport: Pearson Education http://www.bized.co.uk/learn/economics/notes/systems.htm