AS S1 Essay IG-AS SIA

IG essay:
1. (c) Using a production possibility curve diagram,

analyse the effect of an increase in unemployment on a
country’s output.
2. (d) Discuss whether the advantages of the market

system are greater than its disadvantages. [8]
AS essay:
1. (a) An economy contains just two sectors, an

agricultural sector and an industrial sector.
With the help of a diagram, explain how a production
possibility curve (PPC) can be used to
show the concept of opportunity cost and consider
whether opportunity cost is likely to remain constant if
resources are reallocated from the agricultural sector to
the industrial sector. [8]
2. (b) Discuss whether the price mechanism is an

effective way to solve the basic economic problem. [12]
The price mechanism is a term used to describe the
means by which the many millions of decisions taken
each day by consumers and businesses interact to
determine the allocation of scarce resources among
competing uses. Invisible hand of the "price mechanism"
operates in a competitive market through the pursuit of
self-interest to allocate scarce resources in society's best
interest. This remains the essence of the ideology of free-
market system. In a free market economy with limited
government involvement, price mechanism is the
organizing force. It functions as a signal and an incentive
for producers to act in the required way to maximise their
gain, which, in turn, optimises the allocation of
resources. Everyone in this system is motivated by pure
self-interest. Consumers maximise welfare, firms
maximise profits and the private individuals aim to
maximise the rewards of resources they own. It is argued
that in doing so individuals will be guided as if by an
•invisible hand' to achieve maximum social welfareforthe
nation as a whole. There is consumer sovereignty i.e.
through price system, consumers indicate their wishes
and community^ productive resources are allocated
accordingly. In addition, firms keep production costs as
low as possible to obtain highest profit margin. Thus,
allocative and productive efficiency will occur. The
government's role is to protect intellectual property rights
through patents & copyrights. Hence, there are incentives
for firms to be innovative and produce better quality
products. Firms also compete with each other on price
and always be looking to produce something new to get
ahead of their competitors It is of no surprise, therefore,
that consumers benefit from lower prices, better quality,
and a much larger choice of goods and services.
However, the outcome of price mechanism is undesirable

when markets malfunction. Market failure occurs when
the signaling and incentive function of the price
mechanism fails to operate optimally leading to a loss of
economic and social welfare. For example, public goods
such as streetlights cannot be provided privately because
of their two characteristics, non-rivalry and non-
excludability. These goods have to be provided publicly
or else they will never be produced through price
mechanism. Another failure occurs in case of merit and
demerit goods. Consumer preferences to consume these
goods and services may be based on imperfect
information on the costs and benefits. Thus, merit goods,
like health and education, tend to be under consumed and
demerit goods, like cigarettes and alcohol are over
provided.
Also, while responding to price mechanism individual

producers base their production decisions on private
rather than social costs. Therefore, the market may fail to
take into account the external costs and benefits arising
from production and consumption. Moreover, in some
markets individual preferences may be distorted and
shaped by the effects of persuasive advertising and
marketing to create artificial wants and needs.
On top of these, the system may be judged as 'un*fair
because there may be considerable inequalities in both
income and wealth arising from the operation of price
mechanism. Since the wages for labour are determined
by the forces of demand and supply, therefore, all those
who can afford and obtain better education or are blessed
with particular talent, that is high in demand, will be able
to command higher incomes and hence, larger share from
the nation's output. Others may not be so fortunate and
thus receive far lower incomes and comparatively a
lower share from the nation's output.
Like any other system, the capacity of price mechanism

to solve the problem of scarcity is limited. However, the
system, by far, seems to be more effective in dealing with
the problem yet its effectiveness depends on the degree
of failure. Overall, with all its merits, price mechanism
does not solve the problem of scarcity but is considered
effective in dealing with the problem when operating
efficiently.

AS S1 Essay IG-AS SIA

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AS S1 Essay IG-AS SIA

Uploaded by

Copyright:

Available Formats

IG essay:

1. (c) Using a production possibility curve diagram,

2. (d) Discuss whether the advantages of the market

1. (a) An economy contains just two sectors, an

2. (b) Discuss whether the price mechanism is an

However, the outcome of price mechanism is undesirable

Also, while responding to price mechanism individual

Like any other system, the capacity of price mechanism

You might also like