Economics for Business and Management Essay Example | Topics and Well Written Essays - 3000 words - 1

Economics for Business and Management - Essay Example At price P2, buyers are willing to buy thus creating excess demand in the market which in turn pushes the prices up to P where quantity demanded is equal to quantity supplied thus clearing the market. . Excess demand Fig. 1.0 Price Mechanism by Adams and Periton 2009 Resource Allocation The allocation of resources in a country is determined by the economic system in place. The pure market system has many sellers and buyers and sellers act as price takers. The consumers and producers act based on self interest and have perfect knowledge of the market conditions. The products sold are homogenous thus there is no non-price competition or control over market prices. Firms enter freely in the market and the factors of production are privately owned (Anderton, 2000). Profits act as a sign for producers to increase supply and in effect they employ the best combination of resources that can give them maximum profits (Myers, 2004). Low prices acts as a signal for consumers to buy. Lipsey and Chrystal (2007) argue that when demand is more than supply, the prices rises and falls when supply is more than demand. Allocation of resources is though supply and demand forces. The pure command market is run by one producer selling unique products. There is no competition hence the producer determines the price. The producer can decide whether to raise prices by decreasing the supply in the market or operate at supernormal profits. Entrance to the market is restricted by scarcity of resources, government regulations, and monopolist anti competitive behaviour. The consumer choice is restricted as the government provides what it deems fit for the population. The factors of production are owned by the state hence resource allocation is the duty of the state through a planning process (Anderton, 2000). Arguments in Favour of Free Market The free market economy is considered as the most efficient in allocation of resources. The welfare of the society is maximised when demand equals su pply or social marginal benefits equals social marginal costs (Gillespie, 2007). All individuals are driven by self interest and thus the consumers determine the demand for products, the sellers produce the goods to satisfy the demand driven by profit motive and thus combine factors of production in an efficient way to achieve the goal or be pushed out of the market. This results in low cost production and provision of high quality goods at a low price to the consumer. There are no barriers to entry in a free market thereby allowing competition between sellers. If the sellers earn abnormal profits, this acts as an incentive for competitors to enter the market thus sharing the profit and pushing the prices down (Baumol, 2002). As supply becomes more than demand and the many sellers have to attract customers by selling at low price since consumers are guided by the law of demand; the lower the price, the higher the demand. The consumers also have a variety of alternatives to choose fr om due to presence of many sellers. Baumol (2002) argues that a free market is engaged in a continuous process of innovation. Competition leads sellers to engage in research and development so as to come up with new ways of producing a product which are efficient and differentiate it from other competitors. This leads to innovations of technology and more advanced