QUESTIONS:

1. Explain the relationship between scarcity and choice in economics.

The objective of economic is to provide guidance, on how the economic resources of the world
can be allocated to the benefit of all. Hence scarcity happens when there is limited resources to
satisfy unlimited wants and therefore cannot be satisfied. Thus, all choices means that one option
is chosen over another. However selecting between option includes three essentials ideas to
economics: scarcity, choice and opportunity cost. Therefore the following paragraphs are going
to illustrate the association between scarcity and choice in economics.
Scarcity forms part to the essential problems and ideas of economics which leads to the
distribution of limited resources to limitless wants. Moreover, free natural resources becomes
scarce at some point, that is for example if there is an increase in receiving and consuming them,
it can also be happened a change in customer taste that is an increase in demand for undesired
resources. In addition to this there are some facts that cause scarcity simply put a high request of
resources, supply of means are depleted, structural scarcity due to poor management and
incompetent alternates.
Here is a table to illustrate the causes of scarcity: the demand induced scarcity.
Now there is further examples of scarcity which is happening in everyday life, firstly is the
labour shortage, in the past UK has suffered from labour shortage, not enough workers to
undertake jobs, such as bus drivers, more recently there are an emphasis of shortages in some
skilled fields such as nursing. In addition a product is not scarce if the number of demand
exceeds the number of supply, when the cost of the product is zero.

Opportunity cost
It is during conditions of scarcity that economists define that might be the key concept in all the
economics , the theory of opportunity cost. Thus the definition of opportunity cost is the most
appreciate option is relinquished by making a choice.
Here are an example to illustrate the theory of opportunity cost. First of all with students, that is
with tuition and fees. For the majority undergraduate students the significant cost of is going to
institutes. Therefore typically , three quarter of the private price of a higher education is
supported by the student and student’s family. It is the earnings that grad student renounce by not
working. A great extent of this opportunity cost is the revenue that any new high school graduate
being able to gain by having a full time employment.
In addition opportunity cost can be identified at different level such as a firm needs to make a
choice which methods of production should be used in order to be more efficient to maximize
profits and state chose among different development projects that is investing in education or
build up a new hospital.
At this stage it illustrates the relationship between scarcity and choice. Thus there are three
assortment which are concerns that is :What should be made? How should goods and services
should be made? For whom should goods and services be made? This are the choices that every
economy must faced due to scarcity. Additionally scarcity and choice form part to our
fundamental economic problem.
Furthermore with modernization our world is becoming more and more scarce, hence human
beings want and need a multiplicity of goods and services. Thus, this is applying to different
classes of people that is poor and rich. However people wants are unlimited as it has been stated
above but the resources are limited. At some point a finite number of goods and services that can
be generated. Hence this is due the current provision of means such as land, labour, capital and
entrepreneurship are very insufficient. These means can be called as factors of production which
are used in manufacturing of goods and services and can be named as economic growth. Hence
these evidence clarify scarcity as the major issue of every society.
Moreover in the modern era, the society can made a small amount of goods and services. Thus,
scarcity of means leads to an increase to essential economic issue of choice. It is related to
sacrifice, every society is dealing with the fact of choosing the most desire product. Hence
problems of choice can occurs when there are other methods of producing goods as well as
choices made by people such as government, companies.
As conclusion the theory of scarcity, choice and opportunity costs are at the center of economics,
and it has been explained above the relationship between them. A good or service is sparse if the
choice of one option involves that another one to be forgone.
2. Explain what do you understand by a free market economy and how resources are
allocated under a free market economy.
There are different types in which countries decide to run their economic system. These systems
consists of Command economy, Free market economy, Mixed economy. In accordance with the
reality economics they all differ to the scope to which they depend on free market to assign
means, and the scope to which they count on the state for decision making. In this statement
there will be more emphasis about free market economy, which will include on how it allocates
its resources.
First of all free market economy also known as laissez-faire can be defined as there is no
intervention of government in the procedures that is the market forces. Thus, in a free market
companies and household tend to have as much as possible their personal interest to decide how
means are assigned , in terms of what products get made, as well as who acquires the products.
Furthermore it can be said that free market is totally the opposite of command economy, that is
the state has control on profits and how make use of it. Hence in a free market, it has a
conviction that should be only a minimal interference with what the government performs
throughout the economy. This implies for example no control on what how many value should
be charged for fuel and also on wages.
Nevertheless throughout all the states there is no completely of free market economy as all the
economies certain restrictions from the state which includes the regulations, to a higher or lower
extent as an entirely free economy does not take into account conventional arrangements such as
import and exports fees, sales taxes and more. Despite the fact of these regulations the laissez-
faire tends to be free as much as possible by accentuating private ownership including the
resources of production and also labor supply.
Moreover there are some benefits if the free markets procedure. For instance, consumer control
that is, manufactures are more likely to made products based on consumers taste at a reasonable
price, hence there will be a considerable change in the level of demand. Another example is the
motivational impact on entrepreneurial freedom, controlling by invisible hand which is an
economic theory where market requirements acts as signal for manufactures, in other words it is
based on consumers wants for instance if they are disposed to pay for a cake, then the pastry chef
has the economic incentive to bake a cake. Additionally it optimizes the assignment of means
simply put the factors of production in market orientated are rightly allocated. From that time
consumers are disposed to pay for a certain amount of products as well as producers are willing
to buy the essential raw materials to produce that good, else the manufacturers might tends to
product unnecessary goods, this reduce the amount of wastage. Hence it increases the efficiency
of firms as they used the cheapest process of production in order to increase its profitability.
On the other side there are also considerable disadvantages, firstly inferior quality, that is firms
focus on increasing their profitability, tend to decrease their costs as much as possible even
wrongly. Thus profit maximization can lead to discreditable behavior with the reduction of cost
it has negative impact on environment such as increasing pollution. Another negative aspects of
free market economy is that certain individual including adults or other who are jobless this is
because they do not have the skills required. Obviously, there would be an impact on their
standard of living and at some point face poverty. Thus , there might be also exploitation of
workers that is overworking, underpaying and also preventing the rights of workers that is
joining a trade union group.
Lastly, in a laissez faire economy means are assigned in conformity with price mechanism,
which are adapt to supply and demand. Hence there are strong motivation to produce, to be more
effective, in order to attain customer satisfaction as well as arrange circumstances in the real
world such as to compete with consumers and retailers. Additionally, to create new capabilities,
freedom from discrimination ,also finding an approach to be beneficial for the society and
learning from flaws.
As conclusion, the allocation of resources are depending on three questions but free market
economy has some characteristics to be respected such as freedom of choice, self interest,
absence of government and more. From the above it identifies that this system has some positive
aspects as well as negative aspects but it is possible to turn bad things into good ones.
3. Explain inflation, causes and types of inflation and impact of inflation on the
economy.
Inflation can be defined as an approach in which there is an increase in price and where money is
losing its value. Thus, it is a rise in price level not in the price of specific product. Therefore
below there will be more emphasis on inflation, on its type, causes as well as its impact on the
economy.
First of all the inflation rate is the percentage variation in the price level, here is a formula to
illustrate this statement {(P1 – P0)/ P0)}* 100 where P1 is the actual price level and P0 is from
the past year’s price level.
Furthermore there are types of inflation that can be categorized according to its degree. They are
firstly creeping that an increase in prices at least 3% a year, hence its rise is very small and does
not cause harm to the economy. Secondly, walking inflation which is a powerful inflation, it
consists a rate increase of 3-10 % a year, thus it caused harm to the economic for the reason that
it turns up the economic growth very quickly as customers does not control their purchase. The
third is galloping inflation where there is a very high rate of inflation rises to 10 % or more,
hence overturn the economic, loosing potential foreign investors therefore government becomes
unreliable. Galloping inflation must be avoided at all cost. In addition there are more examples
such as hyperinflation, core inflation.

Moreover there are two main causes of inflation, the first one Demand pull inflation which
consists an increase in the total of demand or it might be a decline in aggregate supply. Demand
pull inflation comes up when the economy is grows rapidly, for instance it takes place when
there is a surplus of AD that is when there is a favorable output gap ( current GDP > potential
GDP). Therefore it has also an impact on businesses take action in order to improve their profit
margin, by increasing their prices. Hence it is important to note that demand pull inflation is
related with the boom stage of the cycle when the short run aggregate supply (SRAS) turns
inelastic. In addition to this, it can be caused due to the two elements monitored by the state are
increases in the value of money and also increases in the government procurement, an increase in
export. Thus, with demand pull inflation has initial impact that is based on full employment,
therefore it leads to real GDP increases , which has also an impact, hence an inflationary gap
appears.

Here is a diagram to show the demand pull inflation :

The second main cause of inflation is the Cost push inflation. It can be defined as an inflation
that occurs from an original increase in costs. Moreover there are two principal causes which
leads to an increase in costs: a rise in money wage rate or it can be also an increase in cost of the
money charge of feed materials for example oil prices. In other words Cost push inflation is
ascertained by supply side elements.
Here are more examples of causes Cost push inflation: Imported inflation that is a reduction in
value will rise the prices on the domestic market. As a result of devaluation ,automatically there
will be an increase in inflation and it has an impact on cost of import. As a consequence of
depreciation in foreign exchange, which rise the price of goods. Another example is the Profit
push inflation refers if firms acquire a rise in monopoly position hence they are in situation being
able to increase price so that improving their profitability.
Moreover as it has been stated above the increase in oil price will have an impact on the real
GDP, that is a decline GDP as well as in short-run aggregate and a change in SAS curve. This
can be identified as stagflation. Additionally Cost push inflation may cause a decrease in
economic growth therefore has an impact on standard of living
Here is a diagram to illustrate a Cost Push Rise in the price level

Thus, inflation has considerable impact on the economic. Adequate inflation allows economic
growth for example it is more simple to amend wages and relative wages. Moreover it promotes
growth, that is if there is low inflation , the economy could be remained at the recession stage. It
can be said that aiming for higher level of inflation would lead to an economic growth as low
inflation can lead to a weak economic therefore increase the rate of unemployment an
appropriate example here is Eurozone which has faced a low inflation in 2013-2014.In addition it
can be said that inflation is better than deflation.
Nevertheless a high level of inflation can be harmful to the economic. For example high level of
inflation could be unsustainable, it leads to destructive phase that is from boom to bust where the
level of unemployment increase, demand decreases and income falls. Furthermore the economy
becomes uncompetitive as high inflation may result to exports uncompetitive, it leads to lower
AD, actual account deficiency eventually a reduction in economic growth. Additionally inflation
may dissuade investment as uncertainty takes place during high inflation .
As conclusion inflation impacts on several sectors of the economy such as impact in government,
balance of payment ,different classes of people for example entrepreneurs, investors, income
producer. Thus an adequate rate of inflation approximately 3-6 % often leads to positive impact
on the economy in order to avoid too high rate of inflation which often lead to negative effect.
References
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resources-in-economic-systems/.

Amadeo, K. (2020, August 16). Types of inflation. Retrieved from https://www.thebalance.com/types-of-

inflation-4-different-types-plus-more-3306109#:~:text=There%20are%20four%20main.

Pettinger, T. (2019, November 4). Different types of Inflation. Retrieved from

https://www.economicshelp.org/blog/2656/inflation/different-types-of-inflation/.

Pettinger, T. (2019, July 19). The advantages and disadvantages of Inflation. Retrieved from
https://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/.