QUESTION 1
WHAT ARE THE CHARACTERISTICS OF SOCIALISM, CAPITALIST, MIXED AND ISLAMIC ECONOMY?
SOCIALISM
It is an economy where all the economic decisions are made by the central authority or the government. It is also known as communist system, planned economy and controlled economy. Some characteristics shown in socialism are:
1. Public Ownership of Resources
Under socialism, the government owns most of the factors of production, including factories, farms, and natural resources. All decisions on these resources depend on government. For example, agriculture in Soviet Union illustrates how even this real-world socialist country deviated from total public ownership. Government allowed those holding small private plots on peasant farm to operate primarily in free markets that determined the price and output levels.
2. Limited Use of Price Mechanism to Solve the Fundamental Economic Problems.
In socialist, government set the prices for each goods and services provided throughout the country. Producers and sellers could not increase the price according to their will and their premises will be closed by the goverment if they risk to increase the prices. For example, price of flour in most shop must not be increased when they have a festival as it had happen almost every year.
CAPITALIST
It is a market economy that provides for the ownership of the factors of production and encourages entrepreneurship by offering profit and incentive. Capitalism is historically used by Germany, Japan, France and Canada. The characteristics in capitalist economy are:
1. Private Ownership of Resources
In capitalist system, resources are primarily privately owned and controlled by individuals and firms, rather than having property right be publicly held by government on behalf of society. For example, piece of land that had been own can be used on whatever they want and not against the law.
2. Role of Self-Interest
Under capitalist, economic group attempts to do what is best. Therefore, producers work to maximize their utility but owner of resources work to maximize their income from the resources. In that way, producers will produce and sell goods and services which are highly demanded in the country. For example, landlords will try to charge highest rent from their resources. However, consumers will try to get the lowest price on the goods and services they obtain.
MIXED ECONOMY
It is an economy that comprises of capitalism and socialism economy. Many planned economies have adopted market mechanism through privatization which mean that process of converting government enterprise into privately owned companies. Country that have mixed economy are Malaysia and Singapore. Characteristics of mixed economy are:
1. Private and Public Ownership of Resources
In this characteristics, both the government and private sector play a role to solve fundamental economic problems. Private sector is free to conduct and develop any business or enterprise as long as it is legal.
2. Price Mechanism and Economic Plan are used to Make Economic Decisions.
Producers use price mechanism to determine what, how and for whom to produce most consumer goods and services. However, if the goods or services is very limited, the price will increase drastically and government will interfere to control the price. For example, when there is a shortage of oil, the price will increase. Government will interfere and try to reduce the price from increasing too high.
ISLAMIC ECONOMY
It can be defined as a study of Science that deals with the human behavior in utilizing and managing the resources for his own benefit as well for the welfare of the society as a whole. It is based on five philosophic foundations and a balance between economic freedom and regulated economic system. Characteristics of Islamic economy are:
1. Prime Objective is To Achieve Al Falah
It prime objective is achieving success (Al-Falah) materially and spiritually. It also include achieving true piece of mind and body through complete submission to Allah in all economic activities.
2. Forbidden Goods Are Not Produced
As a devoted Muslim producer and seller, he or she must not produce or sell any forbidden commodity or give service that is forbidden by Islam. They also must not produces any commodity that is wasteful and dangerous such as drugs and cigarettes.
3. All Decisions Should Earn the Approval of Allah
Under Islamic economy, all decision made by the producers and consumers should earn the approval of Allah. Producer make decision whether to sell goods or services on high prices or low prices. When they decide on high prices they are against approval of Allah and vice versa.
QUESTION 2
IDENTIFY DEGREE OF ELASTICITY AND EXPLAIN THE DETERMINANTS OF ELASTICITY OF DEMAND AND SUPPLY.
Price elasticity of demand is the responsiveness, or sensitivity of consumers to a change in the price of a product. It can be divided into elasticity of demand and elasticity of supply. Elasticity of demand is a general concept that can be used to quantify the response in one variable when another variable changes. There are five degrees of price elasticity which is elastic, inelastic, unitary, perfectly elastic and perfectly inelastic.
The formula that used to calculate the elasticity of demand or supply is:
Ed = Percentage change in quantity demanded or supplied of product X
Percentage change in price of product X
1. Elastic (Ed>1)
Demand is said to be elastic if a specific percentage change in price results in a larger percentage change in quantity demanded. The price elasticity of demands will be greater than 1 (Ed>1). Example for elastic demand is clothes. The elastic demand curve is as below:
2. Inelastic (Ed<1)
If a specific percentage change in price is accompanied by a smaller percentage change in quantity demanded, demand is said to be inelastic. The price elasticity of demand will less than 1 (Ed<1). Example for inelastic demand is rice. Rice is a good with less substitute. The inelastic demand curve is as below:
3. Unitary elastic (Ed =1)
Occurs where a percentage change in price and the accompanying percentage change in quantity demanded are equal. The price elasticity of demand will equal to 1 (Ed=1).
4. Perfectly elastic (Ep= infinity)
When a small price reduction would cause buyers to increase their purchase from zero to all they could obtain. (Ed=∞)
5. Perfectly inelastic (Ep =0)
Where a price change results in no change whatsoever in the quantity demanded. The price elasticity of demand will equal to 0 (Ed=0).
Elasticity of supply is a measuring of the responsiveness of quantity supplied to changes in its own price. There are five degrees of price elasticity which is elastic, inelastic, unitary, perfectly elastic and perfectly inelastic.
1. Elastic (Ess>1)
Supply is said to be elastic if a specific percentage change in price results in a larger percentage change in quantity supplied. The price elasticity of supply will be greater than 1 (Ess>1). The elastic supply curve is as below:
2. Inelastic (Ess<1)
If a specific percentage change in price is accompanied by a smaller percentage change in quantity supplied, supply is said to be inelastic. The price elasticity of supply will less than 1 (Ess<1). The inelastic supply curve is as below:
3. Unitary elastic (Ess =1)
Occurs where a percentage change in price and the accompanying percentage change in quantity supplied are equal. The price elasticity of supply will equal to 1 (Ess=1). The unitary elastic supply curve is as below:
4. Perfectly elastic (Ess= infinity)
When a small price reduction would cause buyers to increase their purchase from zero to all they could obtain. The percentage change in quantity supplied supply is infinitely large compared to the percentage change in price (Ess=∞). The perfectly elastic supply curve is as below:
5. Perfectly inelastic (Ess = 0)
Where a price change results in no change whatsoever in the quantity supplied. The price elasticity of supply will equal to 0 (Ess=0). The supply curve is vertical straight or perpendicular line. The perfectly inelastic supply curve is as below:
There are four determinant of price elasticity of demand which are availability of substitutes, importance of the good, time frame and consumption habit.
Availability of substitutes
Demand is more elastic when more substitutes for the product are available. Generally, the more substitutes, the more elastic the demand. For example, tea is a good that can be replaced by other substitutes which is coffee and nescafe. The demand for tea is more elastic when the substitute for the product is more than the tea.
Importance of good
Demand is less elastic when the item is considered necessity good. The demand will be inelastic when the goods is more important to us. For example, rice is very important to us so, the demand for the rice will be inelastic.
Time frame
Demand becomes more elastic over longer time period. Generally, the longer the time period involved, the more elastic the demand becomes. This because, they have more time to find information and substitutes. For example, the demand of tea for three year will be more elastic because they have more time to find its substitutes, which is coffee or nescafe.
Consumption of habit or brand loyally
Demand of an item is less elastic when the item is consumed habitually or loyally. For example, devoted buyer of Rizalman, a cloth designer will even trouble themselves to obtain his clothes. They tend to have inelastic demand for Rizalman’s clothes because these goods are their necessities.
There are four determinant of price elasticity of supply which is time frame for supply, cost of production, substitutability of inputs and degree of perishability.
Time frame for supply
In momentary time period, the supply is perfectly inelastic. In short run time period, the supply is fairly inelastic, the supply will impossible to increase immmediately in response to price changes. However, in long run time period, the supply would be more responsive to price changes. For example, the demand of gasoline. In short run time period, people find it hard to cut back the amount of gasoline they buy when the price rises sharply. So, they buy cars with better fuel economy (more miles per gallon), form car pools and ride buses or commuter trains.
Cost of production
Supply will be elastic when the changes in production cost is small. However, the supply will be inelastic when the change in the production cost is major. For example, when the changes of production cost of table is small, it supply will be elastic.
Substitutability of inputs
Supply will be elastic if inputs can be easily substituted. However the supply will be inelastic if inputs cannot be substituted. For example, in the manufacturing of table, if they can easily use plastics to substitute wood, the supply will be elastic.
Degree of perishability
If a product is highly perishable, especially agricultural product, the supply will be inelastic. For example, the supply for vegetables and fruits which are easily perishable will be inelastic. If a product is non-perishable especially manufactured goods, then the supply would be elastic. For example, the supply for manufacturing furniture which are non-perishable will be elastic.
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