Free Market Economy - Assignment Example

ASSESMENT Type you here Yout Module Here Your Teacher here Question Free market economy is the economy which functions automatically and is not dependent on any governing body for its regulation. The concept of free market economy is the concept of an economy in which there are no barriers for the entry and exit from the business and there are no restrictions on the market as a whole. The demand and supply forces prevailing in the market are solely responsible for the settlement of prices and the supply of products in the market. Thus, the market finds the equilibrium point all by itself without the intervention of any governing body in its matters. The mixed market economy is the one which is set free up to some extent and if gone out of that extent then that economy is governed by the governing bodies. Some boundaries are fixed for the operation of market within which that market is bound to operate and if the working of the market goes out of those boundaries in such a way that it threatens the stability of markets in the long run then the governing body intervenes into the market and tries to settle down the discrepancies prevailing in the market. Although, the free market economy is a market concept in which markets operate automatically but despite that most of the countries in the world have adopted the form of mixed economy in allocating the resources of their economy. This is due to the fact that mixed economy is not let go wild with the consumption of resources. In the mixed economy format of the economies, markets are controlled up to some extent but they are also allowed to operate freely and automatically until they start wasting their resources. Mixed market economy is a better way to handle the affairs of the economy as compared to the other forms of handling the economy. In the mixed market economy there is a freedom to the market which is essential for the enhancement of the creativity that further enhance the capabilities of the market to produce more, better and remain efficient and competitive in the world market. This way markets can perform better with the aim of producing better and better every time they operate. With the help of this economic form, people that work hard and perform better are compensated well for their services and therefore, a general growth is witnessed in the market. The other best feature of operating in the mixed economy style is that the market is not handed to the giant businessmen or business tycoons or monopolies to manipulate for their personal interests instead markets are monitored constantly and if there is any need to intervene into the operations of the market then the intervention is made by the governing body. Hence, in the mixed market economy there never comes a point where things go too bad that they cannot be resolved. If there seems an ailment or a sign of an ailment in the economy then corrective actions are promptly taken for the straightening of wrong matters in the economy. Due to this characteristic of the mixed market economy, most countries of the world rather prefer to monitor their economies under the style and format of mixed economy instead of operating under the free market economy which provides the freedom of not monitoring and intervening in the market operations. (McConnell and Brue, 2005) Case Study Question 2: According to the well established principles of the economics, prices of the products in the free markets find an equilibrium point for them with the change of demand and supply of the products in the market. In this case study, price of palladium fell on the news of the technological breakthrough in the production of catalysts for cars because due to this technological breakthrough the demand of the metal palladium will reduce significantly whereas the supply of the metal will remain in excess of the demand of the metal. With the introduction of new technology in the development of catalysts for cars, the equilibrium point which was earlier set by the intersection of demand and supply curves was shifted. The shift in the equilibrium point then verified some other positions for the long term settlement of the price of metal after settling for a fixed point that determines the new price of the metal with the help of demand and supply function of palladium in the market. Figure 1 Source: Sloman, 2005 The shift in the demand curve of the metal shown in the above diagram depicts the change that has happened in the overall demand of the metal and with the change in the demand of the metal; there comes a change in the supply of the metal. This change in both the demand and supply of the metal affects the price of the metal in such a way that its price is reduced significantly. The news of new technology innovation that will be used in the production of catalysts for cars has affected the demand of the metal and therefore, its price. Due to this news there becomes a reduction in the demand of the metal and thus reducing the price of the metal. As it can be seen in the supply and demand diagram shown above, due to the reduction in the demand of the metal, the equilibrium point at which the price of the metal was formerly set has been disturbed. In order to find a new equilibrium point for the price of the metal, the demand and supply function will try to stabilize each other until they reach at the point where they tend to remain constant. Hence, the price of the metal palladium is likely to reduce in amount because of the reduction in demand due to the news of technological advancement in the production of catalysts for the cars. (Pindyck and Rubinfield, 2004) Question 3: Increase in the production competencies is going to increase the supply of Mazda cars and it will lead it to new equilibrium as shown in figure below. Figure 2 Source: Sloman, 2005 The technological breakthroughs in the production of catalysts like these and some other technological breakthroughs will help Mazda and Nissan a great deal to compete against the low cost producers such as Tata group which produced the $2,500 car in 2007/2008. Technological breakthroughs like these will help the company to cut down their manufacturing costs significantly without compromising on the quality of their output. Reduction in the costs of manufacturing a car is the best way to earn good amount of profit while selling the car at the competitive prices to the world. New technological advancements like inventing a new material for development of catalysts for cars and other technological innovations are going to give a great advantage to companies like Mazda and Nissan over car manufacturers like Tata group of India. Through these technological advancements, the output products of the company will be better in many ways than the products of its competitors. Firstly, the company will be able to accomplish at lower costs what other will achieve at higher costs, thus affecting the prices of the outputs of the company. Secondly, the company will be able to produce better results than its competitors and therefore, will be able to save a lot on the costs of manufacturing of the cars. For any company to remain competitive in the ever changing car market, it is highly important to make technological advancements one after another so that it stays ahead of its competitors and performs better at the world stage. Due to these technological advancements, the demand of the company’s cars will increase all over the world and the sales volume of the company’s cars will also increase. With the increase in sales volume and the decrease in production costs company will be able to generate larger amount in lieu of its profits and thus compete well in the market against those low cost producers. With the development of new technology, the goodwill of the company will also get better with the passage of time and will result in the high sale of company’s cars. The non adoption of new technology in the car industry is likely to create a difference of class in the companies. Those companies that have adopted the technology will be achieving better financial results and earning more profits due to cost reduction. On the other hand, companies that have chosen not to adopt the new technology are earning and saving less in monetary terms and providing the same level of quality in their products as provided by those who have adopted the new technology. (Lipsey and Chrystal 2003) References Richard Lipsey and Alec Chrystal. (2003). Economics. 10th Edition. Oxford University Press. pp. (43-53) Campbell McConnell and Stanly Brue. (2005). Economics. McGraw-Hill. pp. (13-23) Robert Pindyck and Daniel Rubinfield. (2004). Microeconomics Prentice Hall. Pp. (23-38) John Sloman. (2005). Economics New Jersey: Prentice Hall. pp. (20-23) Bibliography Richard Lipsey and Alec Chrystal. (2003). Economics. 10th Edition. Oxford City: Oxford University Press Campbell McConnell and Stanly Brue. (2005). Economics. New York City: McGraw-Hill Robert Pindyck and Daniel Rubinfield. (2004). Microeconomics. New Jersey: Prentice Hall John Sloman. (2005). Economics New Jersey: Prentice Hall Read More