Laissez-faire: Supply and Demand and Demand Curve
TASK 1 Laissez-faire Laissez-faire is an economic environment in which transaction between private parties are free from tariffs, government subsidies, and enforced monopolies, with only enough government regulation sufficient to protect property rights against theft and aggression. The phrase laissez-faire is French and literally means “let them do”. But it broadly implies “let it be”, or “leave it alone”.
A laissez-faire state and completely free market has never existed, though the degree of government regulation varies considerably. The basic characteristics of Laissez-faire economic system
Free competition The main body of the economic operation is for a large number of small private enterprises. Production and management strategies are made ?? by private capitalists according to changing in market supply and demand. Private capitalists are free to participate or exit the economic activity of any of industries. The form of price is spontaneous in market. It shows the change of supply and demand, it can distribute the scarce resources to producers, and also distributes goods and services to consumers. Consumer rights Consumers are the main part of economic operation.
Consumer rights show: private capitalists must be base on and consider the preferences of consumers in the coordination of production and management strategies. According to consumers in the market, the number of monetary voting (consumers use their own money to purchase their favorite products, it is also another form of voting), and understand the social consumption trends. Thus distributes human and material resources, financial resources, production and meet consumers demand to achieve the purpose of maximum profit. Consumers are the guidance of economic activity through the function of preference for certain goods and services.
Protecting of government Laissez-faire economic activities and resource allocation by the market mechanism to promote, the country or the government’s economic functions are restricted to the protection of free competition, protection of private property, set up some necessary public utilities and public facilities. The components are absence to function an idealized free market. The problems mainly in the following aspects: 1. The competition between enterprises is limited, and some may be a monopoly industries. In these cases, they will push up prices, up profits. 2.
The lack of competition to promote efficient and profitable company… 3. Power and wealth may not equal distribution. 4. Some of the company’s behavior is harmful to the society. 5. Private enterprise will not produce some of the whole society to their own advantage but without the product. 6. The free market economy could lead to macroeconomic instability, may appear high unemployment and production of the decline of the recession and rising prices. TASK 2 Government intervention in the market can be used to achieve various economic objectives which may not be best achieved by the market.
There are several policy instruments that the government can use. At one extreme, it can totally replace the market by providing goods and services itself. At the other extreme, it can merely seek to persuade producers, consumers or workers to act differently. Between the two extremes the government has a number of instruments, it can use to change the way of markets operating. These include taxes, subsidies, laws and regulatory bodies. Taxes and subsidies When there are imperfections in the market, social efficiency will not be achieved. Marginal social benefit will not equal marginal social cost.
A different level of output would be more desirable. Taxes and subsidies can be used to correct these imperfections. Essentially the approach is to tax those goods or activities where the market produces too much, and subsidies those where the market produces too little. Taxes and subsidies correct externalities. Government imposes a tax equal to the marginal external cost, grant a subsidy equal to the marginal external benefit. Taxes and subsidies are to correct for monopoly. If the problem of monopoly that the government wishes to tackle is that of excessive profit, it can impose a lump-sum tax on the monopolist.
A tax of a fixed absolute amount irrespective of how much the monopolist produces, or the price it charges. Advantages of taxes and subsidies It forces firms to take on board the full social costs and benefits of their actions. It is also adjustable according to the magnitude of the problem. What is more, by taxing firms for polluting, firms are encouraged to find cleaner ways of producing. Disadvantages of taxes and subsidies Infeasible use different tax and subsidy rates. Lack of knowledge. Laws prohibiting or regulating undesirable structures or behavior Laws are frequently used to correct market imperfections.
Laws can be of those main types: those that prohibit or regulate behavior that imposes external costs, those that prevent firms providing false or misleading information, and those that prevent or regulate monopolies and oligopolies. Advantages of legal restrictions When the danger is very great, it might be much safer to ban various practices altogether rather than to rely on taxes or on individuals attempting to assert their property rights through the civil courts. Disadvantages of legal restrictions The main problem is that restrictions tend to be a rather blunt weapon.
Regulatory bodies Rather than using the blunt weapon of general legislation to ban or restrict various activities, a more “subtle” approach can be adopted. This involves the use of various regulatory bodies. Having identified possible cases where action might be required, the regulatory body would probably conduct an investigation and then prepare a report containing its findings and recommendations. It might also have the power to enforce its decisions. The advantage of such bodies is that a case-by-case approach can be adopted and, as a result, the most appropriate solution adopted.
However, investigations may be expensive and time consuming only a few cases may be examined, and offending firms may make various promises of good behavior which may not in fact be carried out owing to a lack of follow-up by the regulatory body. Price controls Price controls can be used either to raise prices above, or to reduce them below, the free-market level. Prices could be raised above the market equilibrium to support the incomes of certain supplier. Prices could be lowered in order to protect consumer’s interests. The direct provision of goods and services
Social justice, society may feel that these things should not be provided according to ability to pay. Rather they should be provided of right: an equal right based on need. Large positive externalities, people other than the consumer may benefit substantially. TASK 3 To avoid fluctuation of inflation, the related policies of government are monetary policy, Fixed exchange rates, Gold standard, Wage and price controls, cost of living allowance. Monetary policy Central banks must be keeping their inter-lending rates at low levels. To target rate is around 2%-6% per year.
Government can avoid inflation through setting interest rates. High interest rates and slow growth of the money supply are the traditional ways, central banks prevent inflation. Keeping the growth rate of money steadily, and using monetary policy to control it, increasing interest rate, slowing the rise in money supply. Encourage people to put money in the bank. To reduce the number of money circulation. According to Keynesian, reduces aggregate demand when the economic is expanding, and increases demand to keep inflation stable. Increase taxes or reduce government spending.
Fixed exchange rates Under fixed exchange rates, a country’s currency is tied in value to another single currency. This essentially means the inflation rate in the fixed exchange rate country is determined by inflation rate of country. Fixed exchange rate prevents a government from using domestic monetary policy in order to keep economic stable. Gold standard The gold standard is a monetary system in which a region’s common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold.
The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit. The gold standard was partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. In the gold standard system, the internal value of currencies and external value in general is consistent, currency exchange between is stable and the exchange rate also have relatively solid foundation.
Wage and price control Wage and price control is also called Income policy, Income policy mainly is to take wage price management policy, in order to prevent trade unions and the two groups monopoly enterprises still each other caused by the wages, prices take turns to the rising trend. Its purpose is to tries to control inflation and not lead to increased unemployment. Incomes policy based on the theory of main is pushed by cost inflation, because cost inflation is pushed by because of the rising cost of supply, especially wage increase, thus cause the price level to rise.
Therefore, we must take inhibits the incomes policy, the form has the following kinds: sure wage-prices will, in order to limit wages-prices to rise. Base on compulsory measures, impose income tax policy. Cost of living allowance Keep the general level of commodity prices steady, strict control prices, the incomes of the workers and living allowance, reduce the cost of their life, so as to control income and the increased cost of products. The relationship between inflation and employment Demand-pull inflation When aggregate demand exceeds aggregate supply, will cause the general price level continued to rise.
From Philips curve, we can understand that, when aggregate demand is greater than aggregate supply, in order to meet aggregate demand in the short term, we can increase aggregate output to provide more employment. TASK 4 Supply –Demand curve Supply Supply is to point to a producers in other conditions remain unchanged, at one time, ability and willingness to for a price to market with the amount of products. A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. A supply curve is a graph that illustrates that relationship.
The supply curve is supply table and supply the visualization expression, and demand form or demand function of handing over the equilibrium, is used to represent the market producers and demanders can constitute a trade goods quantity and price. The supply curve can with “curve” appeared, also can use the “straight” form. In theory, meet the supply curve only supply theorem can be tilted to the upper right. The determinants of supply follow: 1. Production costs, how much a good costs to be produced 2. Technology used in production, and/or technological advances 3. The price of related goods . Firms’ expectations about future prices 5. Number of suppliers Demand Demand is to point to a consumer in other conditions remain unchanged, within certain time, ability and willingness to buy in a given price of the product quantity. The demand curve is demand form and demand function expression of visualization, and supply table or transfer the equilibrium of supply function, which is used to represent the market producers and demanders can constitute a trade goods quantity and price. The demand curve can with “curve” appeared, also can use the “straight” form.
In theory, can meet the requirement of the demand curve can only theorem is right to tilt, so Veblen Goods and Giffen Goods are general demand curve is not those from left to right leaning items. The determinants of demand follow: 1. Income 2. Tastes and preferences 3. Prices of related goods and services 4. Consumers’ expectations about future prices and incomes 5. Number of potential consumers Equilibrium Equilibrium is about the price-quantity curve, it means the quantity of supply is equal to the quantity of demand.
In the market, when the price is given, the quantity of products that consumers demand is balanced by the quantity of products that producers supply. Demand curve shifts At each price point, greater quantity is demanded, the curve from D1 to D2, at the same time, the equilibrium price from P1 to P2, and the equilibrium quantity from Q1 to Q2. There is an increase in demand which has caused an increase in quantity. The increase can also come from changing tastes and incomes, price changes in complementary and substitute goods, market expectation, and number of consumers.
If the demand decreases, the situation is opposite, the demand D2 down to D1, the equilibrium price decreases, and the equilibrium quantity also decreases. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change in demand. Supply curve shifts When the supply of a product decreases, curve from S1 to S2, it makes the equilibrium price decreases from P1 to P2, but the equilibrium quantity increases from Q1 to Q2.
If the quantity of supply decreases, the curve will from S2 to S1. The equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. Partial equilibrium Partial equilibrium as the name suggests takes into consideration only a part of the market, ceteris paribus to attain equilibrium. Partial equilibrium is based on a limited range of data, a standard example is the price of a single product, all other prices of the products in a fixed analysis.
The supply and demand model is a local equilibrium model of economic balance, clear the market prices of the goods and some specific number won independence in other markets. In other words, the prices of all the alternative and complementary, and income level of consumer is constant. Partial equilibrium analysis testing these policy actions in the influence of creating balance in the industry or market only specific directly affected, ignore its effect in any other market or industry that they were small almost no influence. AD-AS model (Long-term equilibrium)
AS is long-term total supply curve, it and potential output line entirely coincidence, when the total demand curve to AD, total demand curve and long-term total supply curve intersection of the decision’s production for Y E, price level for P. When the total demand increased total demand curve from AD move up to the AD, total demand curve and long-term total supply curve intersection of the decision’s production for Y E, price level for P, because Y = Y = Y *, so in the long run of total demand is growing only raised the price level, and won’t change the production or income. TASK 5 Market Demand for Coffee Form of D0 Price| 1. | 0. 75| 0. 5| 0. 25| Quantity| 9| 11| 12| 14| Form of D1 (Price same as D0) Price| 1. 5| 0. 75| 0. 5| 0. 25| Quantity| 7| 8| 9| 10| Form of D1 (Quantity same as D0) Price| 0. 5| 0. 2| 0. 1| 0. 05| Quantity| 9| 11| 12| 14| If we define D0 is the initial demand curve. When demand decreases, D0 will leftward to D1. We can understand from above form, when D1 same as D0 in price, quantity of D1 is decreased; when D1 same as D0 in quantity, price of D1 is decreased. So the equlibrium of D1 is also decreased. ( the quantity and the price are decreased at the same time) Form of D2 (Price same as D0) Price| 1. 5| 0. 75| 0. 5| 0. 25|
Quantity| 11| 13| 15| 17| Form of D2 (Quantity same as D0) Price| 3| 1. 5| 1| 0. 75| Quantity| 9| 11| 12| 14| If we define D0 is the initial demand curve. When demand increases, D0 will rightward to D2. We can understand from above form, when D2 same as D0 in price, quantity of D2 is increased; when D2 same as D0 in quantity, price of D2 is increased. So the equilibrium of D2 is also increased. (the quantity and the price are increased at the same time) Factors that affect the demand for coffee Consumer income. Generally speaking, in other conditions of constant, the higher the income of consumers, the more demand for commodities.
So the quantity of coffee high income consumer demand is more than the quantity of coffee low income consumer demand. Consumer preferences. When consumers of some goods of preference increased, the demand for the goods number will increase. Instead, when of preference abate, demand will reduce the number. So the quantity of coffee demand that people like coffee is more than the quantity of coffee demand that people don’t like coffee. The price of related products. When the price of a commodity itself is fixed, but and it related to other commodity price change, this kind of goods is the number needs will also be changing. o a commodity demand and alternatives to price but change, namely substitutes the increase in the price of the commodities will cause the increase of demand, the price will reduce substitute caused the reduction of the demand for commodities. Reference of assignment Begg. D. and Ward. D. (2003) Economics for business. Boston: McGraw-Hill Economics for business. Press: FT Finance Abel, Andrew; Bernanke, Ben (2005). Macroeconomics (5th ed. ). Pearson Websites: http://www. conservapedia. com http://en. wikipedia. org