Basic Economic Problem and Market Failure

Batch: 1

Lecturer Name: Daw Sandar Moe Khat

Student Name: Ei Hnin Cho

Date: 15.11.2021
1.(a) Silver Arrow Bicycle Company was founded in 1908 and is still family owned. The
company specializes in bicycles, manufactures a wide range of accessories and sportwear.
The company specializes in race cycling, mountain bikes, club cycling, manufactures
bicycles for travel and family outings. Silver Arrow is made for four major customer groups.

1
These bicycles have proven to be popular, they are often custom designed, hand built and
expensive. The company has made great strides over the past 10 years with rapid but steady
growth. But for the past 18 months, there has been a recession. The company should examine
the basic economic problem during a recession, albeit with a small impact on the recession. I
would like to present and discuss the basic economic problem with the following points.

What to product?

In order to be profitable, a company needs to focus on what kind of bicycles it should

focus on. As the economic crisis unfolds, it is important to carefully identify the types of
bicycles that customers need.

How to product?

With the recession, job levels have risen, making it harder for consumers to buy Silver
Arrow bicycles. The company should definitely look for ways to produce at a lower cost.

From whom to produce?

The economic problem of for whom to produce a product relates to the question of
what types of bicycles should be produced to meet the needs and desires of different
consumers, depending on the income levels of different people.

(b) Opportunity costs are resources that are limited. Producers and consumers must
choose between competing alternatives and the loss of the next best option is the real
sacrifice the opportunity cost. As Silver Arrow, it’s to invest more in automation in their
existing plant. Another is to buy Italian bicycle manufacturer. If the company chooses the
first step, the value of buying an Italian manufacturer is the opportunity cost.

2. (a) As show the diagram,

(i) New legislation significantly reducing the rights of cyclists to access trails in rural areas,
the demand curve is D2.

(ii) A significant increase in the cost of bicycle components used in manufacturing mountain/
trail bicycles, the supply curve is S1.

(iii) A successful advertising campaign promoting the health benefits of cycling, the demand
curve is D1.

2
(b) For each situation in part (a)

(i) Decrease in demand at every price.

(ii) Decrease in supply at every price.

(iii) Increase in demand at every price.

3.

1000
S
800

700
Price(£)
600

500 D

400

20 25 30 35 40 45
Quantity Demand and Supplied

4. (a)
1000
S
800

3
Price S2
(£) 700

600
D
500

400

20 25 30 35 40 45

Quantity Demand and Supply

(b) As the price was reduced from £ 700 to £ 600, the supply increased from 35,000 to
40,000.

(c) New equilibrium price is £600 and new equilibrium quantity is 40,000.

5.

P D

1000 B

4
Price P2

800 A

P1 D

20 25 30 35 40 45 Quantity(thousands)

Q2 Q1

Case A: Price = 800 and quantity = 30,000

Case B: Price =1000 and quantity = 25,000

Percentage price change = The change in price / The Original Price * 100

=(1,000 – 800/ 800) *100

= ( 200 / 800 ) *100

= (1 / 4) * 100

= 0.25 * 100

= 25%

Percent change in quantity demand = The change in price / The original Price * 100

= (30,000-25,000 / 30,000) * 100

= (5,000 / 30,000) * 100

= (1 / 6) * 100

= 0.166 * 100

= 16.6%

Price elastic of demand ED=Percentage change in quantity demand / percentage change in

price

= 16.6% / 25%

= 0.66

Demand is inelastic, Elasticity < 1

5
6. Demand is inelastic because elasticity is less than 1. Demand fell to 30 - 25 as Silver
Arrow rallied to £ 800 - £ 1000. As a result, the volume demand has shifted to 0.66. Due to
inelasticity demand, the price is raised, but the demand does not fall much, so the revenue
does not change.

7. Income elastic of demand is economic measure of responsive the quantity demand

for goods or services is to a change in come. In silver arrows a product is not elastic because
the demand did not effected to economic pressures. Economic pressure the recession has had
a springily small impact upon sales of silver main products. The demand for silver arrow
cycle has to data proved to be income inelastic.

Assessment-2

6
 Labour and consumption spending flow
from households to businesses

Leakages Injections

Households Businesses

Wages and goods flow from business

to households

Savings Commercial Investment

Bank

Taxes Central Bank Gov Spending

Imports International Exports

Trade

Circular Flow of Income

2.(a) The circular flow of income picture shows the flow and productivity of goods and
services between businesses and households. It also shows how to calculate national income

7
or gross domestic product. Businesses produce goods and services and in doing so, factors of
production (land, labor, capital and entrepreneurship) – for example (wages and salaries) pay
the wages and income owned to people.

(b) These red lines are leakages or withdrawals. This is the money that exists our circular
flow.

 Saving – some of the money is saved by households. They hold back some of their
income for future emergencies or future purchases. (eg- savings in banks accounts and
other types of deposit.
 Taxes – some of the money is taxed and transferred to the government. Every country
with a government will have a tax law which citizens have to follow. (eg- income tax
and national insurance)
 Imports – some of the money is transferred between our circular flow and another
country’s. On the diagram how we give money to other countries and it enters their
circular flow of income. (eg- spent on foreign- made goods and services).

These green lines are injections. It is money that enters our circular flow of income.

 Investment – some of this money is invested by businesses in towards the purchase of

capital goods. (eg- capital goods are goods that business need to make output and
investment expenditures).
 Government spending – the government can’t just tax us and keep all the money. The
government uses the tax money that it gets from us, and they spend the money to keep
the country running. Things like public services, roads and building, etc are all funded
by the government.
 Exports – some of the money that enters our circular flow is from other countries. It is
for our exports. Other countries pay us for it.

3. Three different ways that national income is measured and a differently associated
with each method are:

 Expenditure method = Consumption + Investment + Government + Net Exports

 Income method = Wages + Rental rate on capital + Firm Profits
 Output method = Final value of all goods and services – Intermediate costs

8
 4. Nominal GDP

Nominal GDP is the value of final goods and services produced within a country in a
given year when valued at the prices of that year. (GDP in current prices).

The formula of Nominal GDP,

Nominal GDP = The quantity of each product * Current market price

Real GDP

Real GDP, also known as inflation- adjusted gross domestic product, measures the
value of finished goods and service at base-year price. Real Gross Domestic Product (GDP)
is adjusted for inflation or deflation by using the nominal GDP and GDP deflator.

The formula of Real GDP,

Nominal GDP
Real GDP =
R

Where: GDP = Gross Domestic Product

R = GDP deflator (price index)

Recommendation

Year Price of laptops Quantity of Laptops Price of phones Quantity of phones

2016 $ 520 110 $1,050 30
2017 $ 600 112 $ 1,075 32

Given such a table, if calculate nominal GDP 2016 and 2017 and real GDP in 2017 using
constant 2016 prices.

 We must first look at the year to be calculated. Eg- 2016 or 2017

 According to the formula for calculating the nominal GDP of 2016 and 2017.
 Formula: Nominal GDP = The quantity of each product * Current market price

2016 nominal GDP = ($ 520 * 110) + ($ 1,050 * 30)

= $ 52,700 + $ 31,500

9
 = $ 84,200

2017 nominal GDP = ($ 600 * 112) + ($ 1,075 * 32)

= $ 67,200 + $ 34,400

= $ 101,600

 Secondly, if we count 2016 as a basic year.

 Basic year 2016’s price * 2017’s quantity so that,

Real GDP 2017 = ($ 520 * 112) + ($ 1,050 * 32)

= $ 58,240 + $ 33,600

= $ 91,840

The above of statements are the calculation form of Nominal GDP and Real GDP.

Assessment-3

10
1.Market Failure

Market failure refers to the inefficient distribution of goods and services in a free
market. In a normal free market, the price of goods and services are determined by the forces
of supply and demand, and a change in one force causes a change in price and a change in the
other. Changes lad to price balance. Market failure occur when market distortions are
unbalanced. Occurs when the amount of goods and services supplied doesn’t match the
amount of goods and services requested. Some distortions that could hurt the free market
include monopolies, price restrictions, includes minimum wage requirements and government
regulations.

Externalities

An externality refers to costs or benefits that result from a transaction and affect a
third party who has not chosen to share in the benefits or cost. They can be positive or
negative. A positive externality has a positive impact on third party. For example, providing a
good public education primarily benefits the students, but the benefits of this public good
accrue to society as a whole. A negative externality, on the other hand is a negative effect
resulting from the consumption of a product that negatively impacts a third party. For
example, smoking cigarettes while primarily harmful to the smoker himself also has a
negative impact on the health of these around the people near the smoker.

Public goods

Public goods are goods that are consumed by a large proportion of the population and
whose cost doesn’t increase with the number of consumers. Public goods are both non-rival
and non-excludable. Non-rivalrous consumption means that the goods are efficiently
distributed to the entire population when they are provided at zero cost, while non-excludable
consumption means that public goods can’t exclude non-payers from their consumption.
Public goods lead to market failures when a portion of the population that consumes the
goods doesn’t pay but continues to use the goods as an actual payer. For example, police
service is a public good that every citizen can use whether or not they pay taxes to the
government.

Market Control

Market control take place while a buyer or seller has the power to determine the price
of a product or service in a marketplace. Power prevents the natural forces of supply and

11
demand from setting commodity prices in the market. On supply side, sellers can control the
prices of goods and services when there are only a few large sellers (oligopoly) or a single
large seller (monopoly). Sellers can collude to set higher prices to maximize their profits.
Sellers can also control the quantity of goods produced in the market and collude to create a
scarcity and rise the prices of goods. On demand side, buyers have the power to control the
prices of goods when the market involves only one large buyer (monopoly) or a few large
buyers (oligopoly). When there is only one or a handful of large buyers, buyers can exercise
their dominance by colluding to set the price at which they are willing to buy the products
from producers. The practice prevents the market from matching the supply of goods and
services with demand.

Imperfect information in the market

Market failure may also be due to a lack of appropriate information between buyers or
sellers. This means that the price of supply or demand doesn’t reflect all the good profits or
opportunity costs. Lack of information on the part of the buyer may mean that the buyer is
unaware of his or her actual benefits and may be willing to pay a higher or lower price for the
product. On the other side, insufficient information on the seller’s side may lead the seller to
be willing to accept a higher or lower price for the product than the actual opportunity cost of
producing it.

Recommendation

 Market Failure occurs when those who work for a reasonable profit are less than the
best or least economically viable results.
 Market failures can occur in specific markets where we completely buy and sell
products and services that we consider to be regular markets,
 Exchange of favors and special relationships can also lead to market failures.
 Market failure can be addressed through private market solutions. This can be done
through government- designated solutions or voluntary collective action.

2. Environmental policy is the extent measured by the government or corporation or any

other public or private entity. In particular, measures designed to prevent entity. In particular,
measures designed to prevent or mitigate the harmful effects of humans on ecosystems.

12
(a) Our environment is full of problems, and over time, those problems get worse. Living
things are moving away from the real environment and are facing serious problems.
Therefore, it is important to be aware of the presence of these problems and to know what can
be done to reduce their negative effects. Therefore, I would like to choose a policy. This is air
pollution. Air pollution is a plastic, toxins such as heavy metals and nitrates cause air, water
and soil pollution. In addition, toxins and gases emitted by factories, fossil fuels, acid rain.
It’s also caused by oil spills and industrial wastes. These things cause a lot of harm to humans
and animals.

(b) I would like to discuss ways to control air pollution.

 Industrial zones should be set up away from residential areas.

 The use of high-rise chimneys is essential to reduce air pollution and the use of
electric raindrops on chimneys.
 Removal of toxins through a tower scrubber or spray collector.
 Use high temperature furnaces to reduce the emission of ash particles.
 Development and employment of non-combustible energy sources. Eg-wind power,
tidal power, geothermal power, nuclear power and solar power, etc.
 Use of non-lead antiknock agents in gasoline.
 Pollution- free fuels for cars, such as alcohol, Hydrogen efforts should be made to
develop battery power. Exhaust emissions controls should be installed on vehicle.
 Industrial plants and refineries should be equipped with equipment for waste removal
and recycling.
 Growing plants that can repair carbon monoxide.
 Growing plants that can neutralize nitrogen oxides and other gaseous pollutants.
 The government must also set rules and regulations regarding air pollution. Eg- if they
produce more than the set standard, they will have to pay fine and more taxes.

(c) The British government’s main environmental police force had met with failure and
success. One notable policy that failed was try to maintain or reduce the number of cars used
in Britain. However, the UK government has not been able to fully implement this policy.
Despite the ban on privatizing railways and regular bus routes, government policy has sought
to encourage people to use public transportation instead of their own cars. The government is

13
raising fuel and tolls to increase the number of vehicles that cause air pollution. While these
plans certainly increase revenue for the treasury, they are unlikely to reduce overall car use.
The failure of policy has not been as harmful as might have been expected, as through a
combination of legislation, innovation and greater fuel efficiency, the environmental damage
caused by newer cars had been reduced. The success of the government’s environmental
policy has been reducing greenhouse gas emissions since the 1990s. While UK governments
should be commended for their efforts in this direction, part of the success is due to the rule
of law. However, there’s skepticism about the completeness of sustainable development in
the long run, especially as energy levels from renewable sources will not able to effectively
replace fossil fuels once they’re exhausted. In my opinion, the UK has a lower percentage of
pollution reduction capacity, so I think the policy is a failure.

Recommendations

 Environmental policies are needed because organizational decisions often don’t take
environmental values into account. There’re two main reasons for this value.
 The first is that environmental impacts are external economic impacts. Contaminants
usually don’t accept the consequences of their actions. Negative effects often occur
elsewhere or in the future.
 Secondly, prices are almost always low because nature resources are often considered
unrestricted.
 Our constant exposure to air pollution is responsible for the deterioration of human
health. It’s a significant risk factor for human health and can lead to allergies, heart
disease and stroke. In addition to respiratory and cardiovascular diseases, it can cause
lung damage.

14