Features of Economic systems

Basis Command Market Mixed

Decision - making The government or Economic decisions Government and individuals
other central authority are made by share the economic decision-
makes all economic individuals making process. (Combines
decisions. Individuals competing to earn elements of pure market and
have little, if any, profits based on command economies)
influence over supply and demand.
economic functions Also called
“capitalist”
economy
Ownership of Resources are owned Resources are Resources are owned by
resources by the government owned by individuals as well as
individuals government
Incentive Factories are Profit, not quotas, is Government guides and
concerned with quotas the motive for regulates production of goods
increasing work and services
Competition There is no Competition Government serves to protect
competition; the determines price and both producers and consumers
purpose of business is increases the quality from unfair policies and
to provide goods and of products practices
services, not to make a
profit
Regulation Consumers have few, Individual freedom Businesses, but the
if any, choices in the is considered very government regulates certain
market place. The important; industries
government sets the individuals have
prices of goods and freedom to make
services economic decisions

Advantages
Command Market Mixed
Ensure stability -Prices determine by market See advantages of
forces (supply and demand); command
competition brings down prices and market economic
systems

Serves people -Consumers can buy whatever Can focuses on social

collectively they like in whatever amounts welfare
instead they want and political freedom, as
of individuals; well as
focus on equality individual liberties
Distributes Adjusts to change easily
wealth among all Little government intervention
of
society

Products Great variety of goods and

produces fulfil services
needs
Capital flows to where it will
get the greatest return

Disadvantages

Command Market Mixed

Often there is insufficient Does not always provide See disadvantages of
resource distribution, i.e. basic needs of everyone in command and market
Shortages and/or surpluses society, which can lead economic systems
people to slip into poverty

Cannot determine societies Make it difficult for May not lead to optimal
objectives and consumer government to provide use of resources
preferences adequate social services

Lack of incentives for There are occasionally Government intervention

innovation market failures can hinder progress

Infringes on personal People can make choices

freedoms which are harmful to
themselves and to others

Can often lead to

corruption
among state planners

Cannot easily adjust to

change
  Consumer Surplus is the difference between the price that consumers pay and the
price that they are willing to pay. On a supply and demand curve, it is the area
between the equilibrium price and the demand curve. For example, if you would pay
76p for a cup of tea, but can buy it for 50p – your consumer surplus is 26p.
Consumer surplus is a measure of the welfare that people gain from consuming goods
and services
Consumer surplus is shown by the area under the demand curve and above the price.

 ECO MID SEM CASE STUDY:

A) Would the demand for apartments in Hackney be relatively inelastic or

relatively elastic? State why. (3)

 There are five main factors that affect the demand for apartments: price of
housing, income, price of substitutes , price of complements (i.e., mortgages)
and tastes / utility.

 In a short-run the demand would be relatively inelastic for the following

reasons:

 Firstly depends on the degree of necessity of the purchase or rent of housing,

and there are not many alternatives for close substitution; new apartments
cannot be built in a short time.

 Furthermore taste also affect the demand, individuals that are renting in this
particular area prefer to live with people of their own ethic group as they are
discriminated in other areas of the city.

 All these factors make the demand for rents increase.

 The demand would be relatively elastic in a long run, because customers

would be more sensitive to a change in price as their income is low.

B) Would the supply of apartments in Hackney be relatively inelastic or

relatively elastic? State why. (3)

The factors affecting supply are the same as those affecting the demand,
but in opposite directions. The supply of housing is determined by these
factors: the profit in building houses compared to other activities, other
uses of the land, and how easy it is to build houses.

In a short run the supply of available housing to rent in Hackney is

relatively inelastic, because a rise in demand leads to sharply higher prices,
however people will still go for it because there is a close relationship
 between a change in price and an increase in supply of new properties
becoming available in the market in a short period of time. So the less the
supply, the higher up the demand curve will the equilibrium price be.

Supply can become more elastic over time, if the demand remains high,
more properties will tend to come onto the market, and this helps to put
downward pressure on the price.

C) Draw the demand and supply curves as you have described them, showing
the initial equilibrium price and quantity. Label carefully. (3)

D) Now assume the government creates a rent supplement program. Under

this program, the renter is required to pay 30% of income in rent. Any
additional rent is paid by the government — up to a limit. For example, a
low-income person with an income of £1,000 a month would be required
to pay £300 in rent (30%). If the rent is £500, the other £200 would be paid
by the government. Analyze the results of this program

E) Show the changes on the graph and explain what will result. (2) Who gains
and who loses from this program? (1)

The government might adopt this measure to improve the general welfare.

Rent limits act as a means of controlling the level of expenditure on rent

supplements.  In practice, tenants (and landlords) have little incentive to
agree rents below the rent limit levels.  

Selective lowering of rent limits when market rents fell could have resulted
in lower expenditure. 

In order to maximise the value of its spending and avoid the risk of
windfall gains to landlords, the Department needs to be in a position to
promptly adjust the rent limits for new tenancies (nationally or on a
selective basis), and to exploit its effective purchasing power in response
to market conditions.

There is a need to make this work more effective by developing methods

to identify the extent of fraudulent or unwarranted recourse to rent
supplements. 

Rent control reduces the incentive of landlords to supply rental units.

Rental units tend to be in scarce supply under rent control. Ironically this
leads to an escalation of complaints against the landlord class. Vacancy
levels tend to be relatively low and a available units tend to be rented only
under strict conditions, again aggravating relations between landlords and
tenants. There is also an incentive for landlords to discriminate against
tenants likely to stay for a long time, like retirees or couples with children.
Rent control tends to lead to bullying and illegal behaviour by landlords. If
rent increases are allowed between vacancies, landlords will try to evict
tenants in any way possible.

Tenants in tenancy rent controlled units are less willing to move to other
places, despite the possibility of earning higher wages.

the removal of rent control can not only increase efficiency in the rental
market, but can also lead to a general lowering of rents, making all tenants
better off.”

Rent control is a price ceiling imposed by the government, and is in place

in many areas across the world. The practice is controversial, as some
people believe it is necessary in order to prevent tenants from paying
unfair rents and in order to allow as many individuals as possible access to
good housing, while others feel that it could create a housing shortage
due to increased demand, that a rent control situation will decrease the
quality of available housing, or that it is simply unfair to the property
owners.

But if rents are established at less than their equilibrium levels, the quantity
demanded will necessarily exceed the amount supplied, and rent control
will lead to a shortage of dwelling spaces.

Instead, now assume that the government decides to provide a building

subsidy to people who build apartments in this low-income area. A certain
percent of their costs will be paid by the government. Analyze the results
of this program (4) Show the results on the graph and explain what will
result. (2) Who gains and who loses from this program? (1)

A rent ceiling would cause a reduction in the supply of apartments

because the price would be too low for some suppliers to sell, so they
would simply not sell. They would benefit more from not selling, and this
creates a shortage of apartments for people who want them. With the
price being a standard for all apartments there would be an increase in
demand. The shortage is the disequilibrium in this market. If the demand
for apartments is inelastic, the price effect (a price increase makes each
unit sell at a higher price which raises revenue) is stronger than the
quantity effect (a price increase means fewer apartments are sold which
decreases revenue). Without the price ceiling suppliers can sell apartments
at higher prices, meaning the price is inelastic, and allows the market to
reach equilibrium. The inelastic price means that with the rise in price the
total revenue will rise (or opposite if the price decreases the total revenue
falls). The market will reach equilibrium because those who are willing to
pay for the apartments of nicer quality will get them, and the amount of
apartments supplied will equal the amount demanded. There will be no
deadweight loss when the market reaches equilibrium because consumer
and producer surplus are at their highest potential without harming the
other. The removal of the rent ceiling will benefit the market, and increase
total revenue and surplus within it.

The price ceiling would cause a shortage of apartments in Marietta. The

price ceiling would be below the equilibrium price, so if the price ceiling is
removed then the price of an apartment will increase and so will the
quantity supplied. Both would increase til reaching equilibrium in the
market. Because of the price increase the total revenue would increase
meaning that the price elasticity of demand is inelastic, and the price effect
is stronger than the quantity effect.