The Differences between Markets and Central Planning - Literature review Example

Managerial economics: Discuss the differences between markets and central planning. Does this issue have anything to do with the demise of the Soviet Union Explain. Central planned economies are also referred to as command economies, in this type of economy the government controls production, the distribution and pricing of goods and services in the economy, the government also owns enterprises in almost all sectors of the economy, as a result the government sets prices, determines what is to be produced and in what quantities. This is in contrast with market economies, market economies are characterized by minimum control of prices and production by the government, prices are determined by the demand and supply in the market. Many scholars have stated that government intervention in the market only makes things worse but they also state that government intervention is appropriate when market failure occurs, therefore this can explain the failure of the Soviet Union communist era which was characterized by direct control of government in the market. Define the Coase Theorem. What explanation does Coase provide for the existence of firms in market economies The Coase theorem states that the problem of externalities will be resolved through bargain when there are no transaction costs and that property rights are well defined, the theorem states that firms in conflict will bargain and one firm may acquire the property right of the other firm however the assumption is that there are no transaction costs. This theory defines the existence of firms in the market economy in that despite the existence of externalities and conflict, firms in a market economy will in the long run will attain equilibrium through bargain and this will ensure proper allocation of resources and property rights Define the elasticity of demand. What has happened to the demand elasticity for most firms during the last 10-15 years Explain. The price elasticity of demand is a measure of the responsiveness of the quantity demanded as a result of change in the price of a good or service, high price elasticity of demand means that when price is increased by one unit then demand will decline by one or more units, there are those goods and services with inelastic, elastic and perfect elasticity of demand. Income elasticity is also a measure that aids in determining the responsiveness of demand to changes in the price of a product, it measure the change in demand of a product as a result of an increase or decrease in income. In the last 10 to 15 years most firms have experienced elastic price elasticity of demand, this has been attributed to the fact that there are many firms in the market and also existence of substitutes in the market, as a result of this an increase in the price of a good will lead to a decline in the demand for that good due to existing substitutes and alternative. Define returns to scale. Do you think that most businesses are increasing, constant, or decreasing returns to scale. Returns to scale is a term used in production, firms will in most cases want to determine the optimal level of production and a firm will increase production depending on the returns to scale, when a firm increases inputs by one unit and the output increases by less than one unit then we have decreasing returns to scale, if the firm increases inputs by one unit and the output level is equal to one unit then we have constant returns to scale, finally if the firm increases inputs by one unit and output increases by more than one unit then we have increasing returns to scale, most businesses will produce at the optimal level of production and this means that they will produce at the point where they experience constant returns to scale and if production increases by more units they will experience decreasing returns to scale. Define monopolistic competition and oligopolies. Provide two real world examples. In monopolistic competition there are many firms and many buyers, the market is also characterized by few barriers to entry, product differentiation and firms have some power over prices, in a monopolistic competition the firms differentiate their products and therefore have power over the prices. An oligopoly is a form of market where there are only a few firms in the market, the firms are engaged in price wars and for this reason they have a kinked demand curve where if a firm increases prices then the other firms will not increase prices but if the firms reduces prices then the other firm must decrease prices. An example of monopolistic competition includes the cloth industry or the shoe industry. For oligopolies a good example is the OPEC which is an organization for the oil producing countries. Define prisoner's dilemma. Provide a real world example. The prisoners dilemma is a concept coined by Melvin Dresher and Merrill Flood, it is part of the game theory which shows optimal equilibriums that would result from decisions made by two parties, it gives an example of two prisoners where both are offered a deal that if they testify against the other then they will set free and the other say gets 15 years imprisonment, however if both testify they will get both 7 years imprisonment sentence. If they both decided not to talk then they will get 6 month sentence, so the problem is what is the most optimal decision that a prisoner will make given that both are separated and one prisoner do not know the other persons decision This concept shows the problems that firms in an oligopoly face in the market, they make decisions depending or taking into consideration the decisions that the other company will make, therefore firms in an oligopoly market is a good example that demonstrates the prisoner's dilemma. References: Phillip Hardwick (2002) introduction to modern economics, McGraw Hill Publishers, New York Read More