Business Economics

UNIVERSITY OF ST MARK & ST JOHN

NAME:                                BUSISO MKWANANZI

STUDENT NO.                        R1404D96115

MODULE:                                BUSINESS ECONOMICS (MBA 608)

PROGRAMME:                        MASTER OF BUSINESS ADMINISTRATION

ASSIGNMENT:                        ONE

DUE DATE:                                3 AUGUST 2014

TUTOR:                                DR MICHAEL

QUESTION 1

CRITICALLY ANALYSE THE VIEW THAT THE FREE MARKET SYSTEM IS THE BEST AND ONLY REALISTIC ALTERNATIVE FOR DETERMINING ALLOCATION OF RESOURCES IN AN ECONOMY

A free market system is an economic system where unrestricted trade between buyers and sellers determines the prices of goods and services. Government has little or no role to play in the operations of this economic system. Welch and Welch (2007) state that the private property rights that accrue to individuals and businesses allow them to use their resources, goods and services as they please.  

Despite the disillusionment with the free market system stemming from the effects and impact of the 2007 to 2009 recession the free market system is still viewed by most people as the best and only reliable alternative for allocating resources in an economy. Welch and Welch (2007) identify a number of reasons why the free market system remains the most preferred option.

The first reason is that strong profit incentives encourage businesses to produce goods and services as efficiently as possible by minimising their costs so as to maximise their profits. Entrepreneurs are encouraged to employ the newest, best and most cost effective technologies to produce goods and services. Likewise income incentives directed at households encourage them to improve their lot and thereby become more competitive and marketable.

Another reason is that competition within the market system increases the variety of goods and services available for purchase. It also increases the quality of goods available on the market. This invariably increases the standard of living of the consumers and may also result in a lower cost of living.        

The third reason is that the free market system gives the consumers unlimited freedom to decide what to spend their incomes on. Consumers consider this economic system to be the best because it gives them control over their buying power and they are not restricted to certain products and

services. They are also not restricted by any law because there is minimal or no government interference.  

In a free market economy individuals’ innovation drives the economy. Hard work and ingenuity is rewarded through success. Successful and innovative businesses are able to out compete other players and receive consistent profits. In my country an example of this is in the mobile phone sector where Econet Wireless Limited has grown and out performed its competitors since its inception in 1998. Today it accounts for 65.3% of the mobile market (ewzinvestor, 2014).

The fifth reason is that in a free market system the price mechanism facilitates information to pass in such a way that it allows businesses to respond relatively quickly to consumers’ wants. In other words, “Prices allow direct signals between buyers and sellers” (Welch and Welch, 2007).

Another reason is that as consumers’ wants rise this encourages existing producers to increase production and thereby attract new investors in a particular industry. The resultant new investment opportunities may attract foreign direct investment to a country. Foreign direct investment may generate employment opportunities for the citizens of a country, particularly in the case of developing countries. A country’s overall gross domestic product also increases.    

The above reasons clearly show that the free market system still remains an important system for allocating economic resources.

QUESTION 2

EVALUATE THE ECONOMIC EFFICIENCY OF DIFFERENT MARKET STRUCTURES AND THEIR EFFECT ON CONSUMERS

Yevdokimov (2012) states that economic efficiency is a combination of allocative efficiency and productive efficiency. Allocative efficiency occurs when a firm produces a combination of goods and services that are valued the most by the consumers. Productive efficiency occurs when a firm “produces the maximum output with given technology and resources; it cannot produce more of one good or service without producing less of some other good or service” Yevdokimov (2012, pp. 17). In other words the firm is producing goods or services at the lowest possible cost per unit.

Welch and Welch (2007) identify four market structures that are used by economists to model the degree of competition that a business faces in a competitive market. These are pure competition, monopolistic competition, monopoly and oligopoly.

In a purely competitive market the firms are price takers since the market forces of supply and demand are the ones that determine the price. No single buyer or seller is able to influence the market price. The firms are allocatively efficient because the price they charge is equal to marginal cost. They are also productively efficient because they “produce at the least costs” Yevdokimov (2012, pp. 78). The competition between the firms also motivates them to increase efficiency so that they become x-efficient. The firms do not waste resources through product promotion and advertising because the products are identical. Consumers fare the best when trading with purely competitive firms. Over the long run the consumers do not pay the supplier economic profit; they get the goods or services at the lowest possible price (Welch and Welch, 2007).