Function Of Price In Market Economy Economics Essay

In the current competitive economy, any entities from non profit to multinational organizations that are considered as cash cow are in high demand for economic knowledge to survive. Economic system is the system by which the economy is organized. In this paper we are going to discuss about different types of economic systems, their variety, advantages and disadvantages.

Function of price in market economy

A market economy or free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them (J.Stanely Johnson, Introduction to economic analysis P1-1).In Market economy The price of goods plays a crucial role in determining an efficient distribution of resources .Price acts as a signal for shortages and surpluses which help firms respond to changing market conditions. In a market economy Price is determined by demand and supply, for example when there is a low price for a good it means the demand is low. However in market economy price for abundant goods never gets high to a critical point due to the fact of consumer sovereignty environment which consumers are the rulers for suppliers.

Figure: 01(Demand chart). Describes the demand relationship with quantity and Price

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As it is observed in figure 01; P1and Q1 interception determines a good with high demand and low quantity so the price is at the highest peak. In opposite side of the Demand law there is supply law.

Figure: 02(supply’s chart) describes the supply relation with price and quantity

Source: http://bit.ly/1LhnYp

As it is shown in supply’s chart when the price is high for a product, supply will increase accordingly. And on the other hand equilibrium or balance will happen. As bellow

Figure: 03(equilibrium chart) describes How supply, demand, price and quantity are stable

Source: http://bit.ly/1LhnYp

Figure 03, determines how supply is dictated by price. Role of other factors like excess demand and excess supply are not declinable in determining the price in a market economy but is out of this paper’s capacity.

Market economy Vs command market

Command economy is an economy system that all economic activity is regulated by the government, formerly in China and the Soviet Union are two appropriate examples for such economic system.

There are two opposite approaches to an economy’s operation.  The command economy is Hierarchy from top to down, and centrally planned economy of socialism (Roberts, Paul Craig and Karen Lafollette, Melt down: Inside the soviet economy, Cato institute ,PP12-13)  The market economy is the divided economy of the market economy.  The most tangible difference between the two is the existence of private property in the market economy and the absence of private property in the command economy. The belief about command economy is that it is planned and organized while market economy is unplanned. Contradiction to this view is the fact that market economy is very intelligently planned via consumer demand through the price system. Moreover, for five reasons the command economy is doomed.

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First, effort to plan an entire economy by a main decision making body is ineffective as the bulk of task is tremendous. That is impossible that a board of few hundred planners could know the needs, conditions of resource availability, and localized knowledge spread throughout an economy. Second, the command economy motivation factor eventually is based on force and compulsion. The main element in an economic system is in fact people; therefore controlling an economy is first and foremost control of people. Unfortunately human motivation is reduced when force is used in any area which dooms that entity to end.

Third, the command economy is based on collectivism which means collective control over production and distribution.  Individual encouraging is absent. For example, with ten employees in an economy each will receive one out of tenth of total output.  If one person neglects, his loss is only one of tenth of the production he would have produced. So the loss for an entity with a population of millions is dramatic and sometimes irreversible .It turns out that everyone is trying to live at the expense of others and accordingly production efficiency and effectiveness both will reduce.

Four, the incentive for production is to satisfy the political authorities who have control over the workers life.  In contrast to the market, where production is relied on consumer’s demand, consumer is not a vital factor to the command economy.

And last but not least, economic risks are much likely to be higher in command market in compare with market economy, failures such as excess demand and excess supply are more likely to be less or at least are not as intense as command market as consumer’s demand plays a vital role in market economy and is more manageable.

Command economy has advantages as well such as bellow

Government removes all private contributors and tries to contribute products equally. In this way poverty level will be reduced and there is equal income. Social services are also emphasized in this type of economy. Command economy has capability of fast changes in major problems. For example if a company has to be shifted it will be fast as government has the whole power.

Practically bankruptcy does not exist under the command of government and if there is a loss in any enterprise it will be compensated by other resources that are under command of government. For example if any entity has loss and is in need of cash government is responsible for cash injection.

In overall every economy system has its own advantage and disadvantages, the current economy paces are toward capitalism which might be the answer to all of prayers. Even though there is no pure market economy systems used in the world and are most considered as mixed economy but still changes are toward capitalism and countries with the background of command economy have taught us that consumer demand is most important factor in economy which its ignorance causes the failure of the whole system.

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Factors that influence the demand for mobile phones

Mobile phone markets are one of the most turbulent market environments today, due to increased competition and change. So it is important to look at consumer’s decision process and recognize the factors that determine the consumer’s choice between various brands of mobile phones.

Factors that influence the demand for mobile phones are vary; we try to cover some of the most important.

Technology: twenty century is the communication century, every day new phones by new features are produced, when there is a new technology or feature is added to mobile phones it will increase the demand, as an example for technology, when a technology like Bluetooth started to be added to new phones, demand for the phones with this technology increased, or for new feature like camera the demand increased. Nowadays mobile phone companies are using societal marketing concept as their marketing plans, which means they focus on consumer needs, while some companies like apple go even further than this concept and determine new needs for customers by invention and technology. They create something in a manner that goes higher than demand and become a need which is described as state of felt deprivation. While demand is described as human wants based on their purchasing power.

Environment, as the world is leading to globalization, environment plays a critical role in determining the demand, as long as a person is in an environment that is affected by a product he/she will get affected by that product, for example resistance to change is much lesser in an environment that is commonly agree on the demand of a product.

Usage of Price elasticity of demand and income elasticity of demand in phone companies

Price elasticity of demand is measured by “the responsiveness (or sensitivity) of consumers to a price change,” according to Campbell McConnell and Stanley Brue (2004, p.356).

The price elasticity of demand tool could be used to assess the several pricing plan to determine if the price should be reduced to attract more consumers, or to increase the price while making the product more attractive and more features to make it better bargain. This way also they can realize how elastic is their supplies. It also could dictate that different phones have different potential in elasticity, for example Nokia company Produces N series and E series, then company realizes the E series are highly elastic while N series are more likely to be inelastic in compare with the E series, so Company increase the production of N series while the price is stable, and lowers the production of E series in order to prevent the risk of excess supply.

Income elasticity of demand is”the ratio of proportional increase in quantity demanded to proportional increase in income, with all prices held constant. A luxury is a good with an income elasticity of demand in excess of unity”. [1] 

According to income elasticity of demand companies can estimate the future prices and production. As income elasticity is more likely to be effective in luxury goods companies can determine also the quality of the goods. As the world economy faced the recession and has just getting out of trough phase is recovering itself which means that in future we will face the peak or economy boom, it is when consumers purchasing power increases and are more likely to intend toward quality rather than quantity. That is when Income elasticity of demand tool could help the companies to determine whether they could increase the quality and/or price and/or quantity accordingly. For example Sony Ericson realizes that demand toward its expensive product is increasing opposed to its highly affordable cell phones. This determines that economy now has the potential for a higher demand especially on expensive products.

Conclusion

In overall doctrine of elasticity in economy helps supplier to understand, interact and connect to consumer. It helps you to have a communion with economic and its factors, also has an important role in planning and even marketing in an organization. A Company Like AirAsia that in the trough of recession Was The only airline that had a “271% ahead of pre tax level profit in the first quarter of 2004” (Fourth quarter repot 2005, Airasia [2] ), While all of the other companies only suffering from loss. Such companies like AirAsia have won their ticket by futuristic and planning using doctrine of elasticity analysis. It shows no company no matter how big needs to have planning and analyze in all its area and aspects.