Economics for Business and Management Essay Example | Topics and Well Written Essays - 3000 words

Economics for Business and Management - Essay Example According to Anderton (2000), the consumers are the ones who determine what is to be produced hence determine allocation of resources leading to allocative efficiency. The demand for goods and services by consumers triggers the producers to increase production thus engaging more factors of production in the process. The income earned by the factors determines the amount of consumption by individuals; the more the income, the higher the consumption or demand. At the initial stage, competition by consumers for scarce resources pushes the prices up. The law of supply states that the higher the price, the higher the quantity supplied thus the producers increase production and get more profit. Since there are no barriers to entry in a free market, more producers may enter the market attracted by the abnormal profits (Griffiths & Wall, 2008). In the long run, supply will increase more than demand and the firms will start competing for the few buyers pushing the prices down. A fall in price means the profits also decline leading to reduction in production by firms and exit from the market by others. An optimum allocation of resources occurs where demand by consumers interacts with supply by producers. The resources are used to produce the goods that are most in demand by consumers hence resources are transferred from one use to another which is more profitable. As such, some people are made well off while others are made worse off. For example, if a firm decides to change the technology used in production it will employ individuals who have such skills and those who don’t possess the required skills are declared redundant and lose their wages. The firm can also use new equipments. High prices make some consumers to afford goods while others cant due to amount of income held by individuals. According to the law of demand, the lower the price the higher the quantity demanded. A reduction in production by producers may force prices up as consumers compete for the goods. The high prices in turn lead to cut in consumption. The producers therefore must innovate ways of producing goods at low cost hence low prices for goods and increased demand. This leads to productive efficiency of the economy (Griffiths & Wall, 2008). Competition by firms leads to innovation as firms try to gain competitive advantage. They thus produce high quality goods to the advantage of consumers. Lipsey & Chrystal (2007) argue that the free market gives better information on changing market conditions thus allowing buyers and sellers to make informed decisions. For example, when prices are low it signals that there is high supply in the market and an incentive for buyers to buy more. High prices indicate scarcity of goods and hence an incentive for sellers to sell more and make profit. High prices also induce firms to employ more factors of production. Due to availability of information, decision makers respond quickly to changes in consumer demand (Vidler & Grant, 2003) . The free market system also allows consumers to have a variety of choices from different firms. Q1 (b): How Market Failure Occurs and how Government can Correct Market Failure Market failure is due to inefficient functioning of the markets. A market should be able to resolve the questions of