Questions and sample answers on economy

Compare the advantages and disadvantages of a planned economy and a free economy

Advantages of free economy

 In a free economy, there is free buying as well as production alongside lowered business cycle. Consumers are at liberty to buy any product they wish. The supplier of the good can as well produce any product they prefer. Secondly, the market price represents the equilibrium point of market demand as well as supply. In the liberal market, the price of goods and services is regulated by the forces of demand and supply; hence there is no exploitation of consumers by sellers. Thirdly, in a free economy the effort invested in an activity determines the level of…

The Australian wine industry has prospered over the last two decades, expanding rapidly into overseas markets. However, in recent years it has faced some problems. Use demand and supply analysis to explain how these two factors (problems) stated below would affect the price and quantity of Australian wine.

  1. There has been rapid increase in the Australian production of wine grapes

The rapid increase in the quantity of wine grapes in the market leads to decrease in the price level of the grapes hence reducing the revenue generated from the sale of grapes.

  1. New wine producers in China and India are producing good quality low cost wine.

The presence of many competitors lowers the amount of sales a company makes. In this case, a cheap and higher quality wine from china and India lures more customers from purchasing relatively low quality Australian wine. Thus decrease in the level of demand and revenue subsequently (Balk 2013, p.96).

  1. In an attempt to support the Australian wine industry the government sets a minimum price. Do you think this is a good idea/ Explain your decision using graphs.

This is a good decision since the price controls safeguards the Australian wine industry from unhealthy competition from its competitors based on variation in prices of wine grapes. The government will set particular price floors and price ceiling within which the industries ought to operate on (Hildenbrand 2014, p. 30).

Explain why a firm can make a loss and continue operating in the short run and under what circumstances it will shut down

In the short run and firms under perfect competition generate economic gain, a normal gain or loss. Economic profit occurs at p>ATC, a normal gain, as well as zero profit, occurs at P=ATC and the loss occurs at P<ATC. A firm experiencing economic loss ought to make a decision of whether to shut down momentarily. At point P>AVC, the production of the firm is sustainable. At level P<AVC, the firm ceases operating for some time. This point represents the …

b). Discuss and show how a price-taking firm determines its profit maximising output level
Price taking occurs in the perfect competitive market. The firm will at all times operate in the production where MC of particular output is equivalent to the market price. In other words the level where P=MC. Therefore, from the diagram, the firm will optimize its profits at by giving an…

Explain why pollution is an example of market failure and why the free market will not provide an efficient solution to the problem. Provide a critique of a carbon tax as opposed to the Australian government Direct Action as a solution to this problem.

Market refers to the situation whereby the economy may give out a lot of or insufficient particular kind of products and therefore default in utilizing the available scarce resources efficiently. Market failure occurs due to a variety of impetus. One of these impetuses is externalities. Externalities occur in a situation where the market defaults in considering entire costs as well as the benefit related to the production as well as consumption of finished products. Externalities are divided into external and internal. In this context, pollution is an example of an external cost externality. Pollution involves the….

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