Planned Economy: advantage and a disadvantage of this economic system from a business perspective Essay
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1.Explain what is meant by the term “Planned Economy”, identifying an advantage and a disadvantage of this economic system from a business perspective?
“In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.” Tutor 2 U. (N.D)1
Along with making all the decisions, a planned economy also own all land and means of producing goods so not to rely on supplies from other economies.
This type of economy is typical in several countries including Burma, Cuba, Iran, Liberia and North Korea.
One advantage is “Production based on needs not consumer spending patterns” 1 as defined by Fet System. (2011)
One disadvantage would be “It does not support innovation” as defined by Future of working. (2016)
2.Define the economic concept of ‘Opportunity Cost’, explain the advantages of this type of cost calculation compared with Accounting Cost?
Opportunity cost is a concept that is always used by economists.
“Opportunity cost is the cost of any activity measured in terms of the opportunities forgone” 2 (Sloman and Sutcliffe, 2004:167)
For example, an individual has £18,000 and the choice of either paying for a 3-year degree or invest in shares. If they chose to invest in shares the opportunity cost would be the lifetime earnings that you may have earned after graduation. (Investing Answers N.D)
Accounting costs are those costs accrued through the production of a service or product.
The main advantage of opportunity cost is that it helps you make a more informed and economically cautious decision. For example, if you went to a supermarket for bread and milk, and realize you only have money to cover one of the items it makes you consider the reality of which is more important and choose accordingly between the two options.
3. Using Supply/Demand diagrams, explain the impact on price and quantity of avocados in the market following a poor harvest, as well as an increase in their popularity due to healthy eating trends?
Supply and demand are factors which determine the price.
Supply – The quantity a market can offer.
Demand – The need or want of the product.
Described as “ the amount of a product which is available and the amount which is wanted by customers” businessdictionary.com (ND)
In the market, the point at which quantity supplied meets the quantity demanded equals the Equilibrium Price.
When changes happen in either Supply or Demand (or both) it causes shifts in the curves. This then alters the Equilibrium Price.
The changes could come from:
A Surplus – When the quantity supplied exceeds the quantity demanded at the current price.
A Shortage – When the quantity demanded exceeds the quantity supplied at the current price.
((SUPPLY & DEMAND DIAGRAM HERE))
From the diagram above, it shows that the Equilibrium Price of the avocados has risen. This would be due to the decrease in Supply because of the poor harvest, and the increase in demand as a result of the growing popularity to eat healthily.
4. Explain the price elasticity of demand for business and leisure air travel, highlighting the key determinants of elasticity for each?
The elasticity of demand measures how responsive demand is to a variation in price. Elasticity can differ from product to product as some are more essential to the consumer than others.
Elasticity means that a change in price will affect demand as consumers can shop around for another variety of that product or service as they are readily available.
“Example of elastic goods and services include furniture, motor vehicles, instrument engineering products, professional services, and transportation services.” 7 Investing Answers (2017)
A direct example of an elastic product is coffee. As there are many substitutes for coffee the consumer has the option to change their choice and not pay the price increase.
Alternatively, when there is a small change in demand when the price changes considerably then this would mean the product or service is inelastic. An example of an inelastic product would be petrol. If price increases then, consumers will still buy as they cannot shop around or change their driving habits.
As elasticity of demand does vary between products, various factors can affect elasticity such as availability of substitutes, time, income, level of need and price.
To focus on business and leisure air travel, for the purposes of this assignment, the air travel industry is essentially an inelastic market as it is a necessity for businesses and many families. To choose where to book, travelers have many options of sub airlines to book with.
Due to the competition between airlines allow the flight purchased to be classed as elastic whilst operating in an inelastic industry.
If, however, prices continued to rise this could cause travelers to choose alternative methods of travel for example boat, coach or train. This would then make the price of elasticity of airline travel elastic for the traveler in the long run.
5. Firms utilize economies of scale to reach their ‘optimum scale of production’. Outline the key concepts, identifying three types of scale economies?
Economies of scale are the cost advantages businesses benefit from due to its size and output. As the scale of production increases, it would reduce the cost of output per unit.
“If a firm is getting increasing returns to scale from its factors of production, then it produces more, it will be using smaller amounts of factors per unit of output” 5-Sloman and Sutcliffe (2004)
There are several types of scale economies. These include:
Plant economies of scale – On a larger scale, workers can be assigned to do one repetitive task. This means that they will become highly skilled and efficient in that one area meaning a better quality at a quicker rate, and fewer costs for training purposes as it isolates the worker’s knowledge to that area. This is known as specialization and division of labor.
Financial economies of scale – When a business is on a large scale and mass producing it can trade on the stock market. Through being listed on the stock market they can secure capital with little interest. Smaller businesses would have to secure loans etc that would usually attract high-interest rates. Tutor 2 U (N.D)6
Network economies of scale – Applicable to online business, or those that have an online option. The high costs involved in setting up a network are fixed regardless of usage. So, the larger that business becomes and has more users, the unit price per customer continues to fall. Tutor 2 U (N.D)6
6. Define “merit” and “public” goods, giving detailed examples to support your explanations?
Merit Goods are “Goods or services (such as education and vaccination) provided free for the benefit of the entire society by a government, because they would be under-provided if left to the market forces or private enterprise.” 8 Business Dictionary
Merit goods are also items that the government believe society deserve on equity, not on affordability. There are also goods offered which may have a positive
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7. Explain the concept of ‘inflation’, detailing how the UK standard measure of inflation (CPI) is calculated?
Inflation happens when there is a rise in the economy, thus raising average prices.
Causes of inflation can include:
Oil – If the cost of oil rises to a topping point, it has a high impact on most goods and services for pricing and productivity, within the UK.
Raised VAT – This would have a knock-on effect on prices as companies production costs may increase to allow for the VAT they are due to pay.
Effects of inflation can include:
Raised Interest Rates – Interest rates are a tool used to control inflation. When inflation is high-interest rates are increased
Cost of goods – When production costs or VAT costs raise it is the decision of the retailer or business to determine whether they keep prices consistent and see profits fall or if they raise prices and possibly lose customers to the competition.
\”How is inflation calculated UK?
The CPI measures the average change in the prices of goods and services bought for the purpose of consumption in the UK. The CPI forms the basis for the Government\’s inflation target that the Bank of England\’s Monetary Policy Committee is required to achieve.\” 9 ONS.COM (2011)
8. Unemployment is classified into four main categories.
Structural unemployment happens when the skills of the unemployed don’t match those required for available jobs. This would happen when a large company ceased trading thus making all its workers, i.e. Factory workers, redundant. These unemployed workers would not have the skills to apply for jobs such as teaching, or skilled trades such as hairdressing or mechanics. There would be a need for retraining.
Frictional Unemployment describes the unemployed who are between jobs or have left a job to find a better one. This type of unemployment, most often, is short term. It commonly happens when students graduate and are looking for a job following their qualifying. They are classed as unemployed until they find the relevant job.
Cyclical Unemployment refers to unemployment that happens when the call for a product or service drops, and so workers to perform the jobs for this become surplus to demand.
\”For example, an auto worker may be laid off during a recession, when people are buying fewer cars. When people buy fewer cars, the automakers’ don\’t need as many employees to meet the consumer demand. So as the demand for cars decreases so does the demand for auto workers.\” Investing Answers (2017) 10
Classical unemployment is created when companies are unable (or unwilling) to pay the wages expected for the role. The consequence is that the role goes unfilled and no one is employed. For example, if a company is willing to pay a salesperson £20,000 per year to comfortably make a profit after wage costs, but workers within that profession consider the minimum wage worthy as £25,000, no one will apply and so classical unemployment is created.
9. A regressive tax is when the rate of tax becomes lower the more you earn.
An example of this would be Council tax. If an annual bill was to set to £2000, people earning £50,000 would only be paying 4% of their earnings. However, if their neighbor with the same bill only earned £25,000 a year they would be paying 8%. Economics help (2016) 11 Regressive tax would hit those on a low income much harder than higher earners. This is because this type of tax is a set rate, taking no account of earnings. This would result in a higher cost of living for low-income families with less disposable income.
A progressive tax is when the rate of tax increases the more you earn. An example of this would be Income tax. For people earning between £11,500 and £45,000, they pay a basic rate of 20%. For those earning above £45,000 would then pay 40% on earnings above the basic rate threshold. This type of taxing has a bigger impact on high-income individuals as they pay to double the tax on higher earnings. This type of tax helps low earners to pay less tax. With a personal allowance set for earnings under £11,500 tax-free, this means that families or single parent families can earn without any tax deductions from their income and use wages on living costs.
10. 1\” A market failure is a situation where free markets fail to allocate resources efficiently. \” Economics online (N.D) 12
A market failure could also be a situation where consumer demand does not match the supplies available.