UNIVERSITY OF ZAMBIA

INSTITUTE OF DISTANCE EDUCATION

SOB 1115: MICROECONOMICS ASSIGNMENT 1
CANDIDATE NAME: MULENGA PRINCE
COMPUTER NUMBER:22102789

GROUP MEMBERS: COMPUTER NUMBERS:

1.MULENGA PRINCE #22102789
2.SIBESO ARTHUR #19002369
3.PINIFOLO JONATHAN #22101089
4.SIMBULE NATASHA #22102087
5.PHIRI RACHEAL #22102157
6.MALILA GERALD #22100881

NAME OF LECTURER: MRS ZULU

TASK: ASSIGNMENT 1
DUE DATE: 11th MARCH 2023

QUESTION ONE

Explain why most governments prefer the mixed economic system as opposed to market or
command economic systems. Word limit: 1000 (25 marks)

Economic systems

An economic system can be defined as the means by which a specific society or government uses to
organize and distribute the available scarce resources across a specified geographic region or
country. Economic systems are meant to regulate the factors of production, which include land,
labor, capital, and entrepreneurship. There are four types of economic systems: 1)Mixed economic
system; (2)Command economic system; (3)Market economic system; and (4)Traditional economic
system.

Mixed economy system is a combination of traditional economy, market economy, and command
economy. The analysis of this definition means that in a command economy, government can step
in to guide the factors of production and control of resources. Market economy, this is all about
individual and businesses benefits and it is largely based on a free market economy with no forms
of government interference. In this type of system, there is little or no government interference, and
the market is controlled by the relationship between demand and supply. Resource allocation is
done through a price mechanism that is subject to the forces of demand and supply. Traditional
economy, this is based on the traditional values of the society. Most countries tend to adopt mixed
economic systems, and Zambia is one of those countries.

The primary reason why most governments prefer the mixed economic system over the market and
command economic systems is that the mixed economic system allows the government to intervene
in the economy where the market fails. This means providing those goods and services such as law
and order, education and healthy services that would have been under-provided if left to the market.
Through a mixed economic systems, the government is able to dictate what the producer should
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produce and bring to the market. Producers are motivated by profit maximization and in a mixed
economy they are able to respond quickly to changes in consumer preferences. A mixed economic
system also allows the government to intervene in cases where there is inflation, for example by
controlling pricing or introducing subsides. According to Adam Smith, (1776). He believed that
without the involvement of government, a free market would create benefits only for consumers and
producers. This is critically dangerous, as it poses a high risk to the social welfare aspect.

The other reasons why governments prefer mixed economic systems is because of the following
merits.

Effectiveness: The free market has been said to have more efficiency in managing the economy.
The nature of the free market is that it is a self-regulated economy based on the laws of demand and
supply. It has the ability to cut costs and maximize profits, which in turn can lead to new
innovations and free up resources that can be utilized for production of goods that can benefit
society.

Resources: since the mixed economy contains features of both capitalism and socialism economy,
resources are used in the best possible way. The price mechanism, freedom of consumption, profit
motive, and occupation all contributes to the efficient allocation of resources.

Equality of control: in contrast to the command economy where government is fully in charge of
production factors, the mixed economy has less government control. This allows private enterprise
to invest their capital in different areas of their choice. It also gives the private market freedom to
operate, expand and grow their businesses.

Social welfare: In mixed economy, the major target is social welfare. Under this system both public
and private sectors work for the welfare of the people. A good example is corporate social
responsibilities. Some private enterprises do provide social amenities to the communities in areas
where they operate, like building schools, clinics, grading roads, providing transport through
donation of vehicles, ambulances to public hospitals, public schools, and in some cases ensuring
that areas where they are operating have basic needs such as clean water by drilling boreholes. The
locals benefits in this way from the private investments in their communities. To achieve this goal,
the governments provides an enabling business environment for these private enterprises to operate
smoothly. In some cases, the governments partners with the private enterprises to achieve the social
aim.

Protection Of Business, Property And Individual Rights: The government prefers the mixed
economic system, because it is able to enforce Antitrust law, this type of law opposes monopolies,
trusts, and other organization or practices that do not allow higher participation from potential
entrepreneurs.
It is through this type of economy that government has the mandate to protect and ensure that private
and public businesses operate in such a manner that both businesses and individuals rights are fully
safeguarded through government agencies. For instance, Zambian government do protect business
and peoples lives through Zambia Compulsory Standards Agency (ZCSA) by ensuring that all
products on the market comply with the Zambian standards, by doing so government is protecting
the lives of people from consuming counterfeited products, expired products.
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SOB 1115: MICROECONOMICS ASSIGNMENT 1
Types of mixed economies:

The mixed economy may be classified in two categories namely:-

Capitalistic mixed economy and Socialistic mixed economy

Capitalistic mixed economy: under this type of economic system, the ownership of various factors
of production are privately controlled. Government has no interference in this type of economic
system, the only thing government can attribute to this system is to ensure that rapid economic
growth. Government can achieve the economic growth under capitalistic economic system through
various ways such as cutting income taxes while adjusting social welfare payments like what the
Zambian government has been doing by increasing the Social Cash Transfer, increment of
Constituent Development Funds (CDF).

Socialistic economic system, government takes over the control of production activities, the forces
of demand and supply becomes the base for decision making. According to the theory of Karl
Marx, he believed that “low-income workers, faced with these injustices, would inevitably revolt
against the wealthy bourgeoisie”. He clearly indicated the importance of equal distribution of goods
and services despite the class of any individual. The socialistic economy focuses much on the
socioeconomic objectives where the profit motive is channeled to the welfare of the people.

In conclusion, most governments prefer a mixed economic system as it enables them to balance
market forces with government intervention to promote economic efficiency, competition, social
welfare, stability, innovation, and social responsibility. A mixed economic system provides the best
of both worlds, allowing for economic growth while ensuring that the basic needs of citizens are
met.

Question Two

A team consisting of three people is working on a big project, which involves manual entry of data
in a computer, with subsequent processing of these data and making a poster presentation.
Naturally, each member of the team has different abilities in performing either task. Adam can make
1 poster or 400 data entries in a day. Brenda can make 2 posters or 1200 data entries in a day.
Richard can make 3 posters or 900 entries in a day.

(a) In an event where each team member has access to their own personal computer, it means that
they are able to make data entries according to their capabilities.

1. Adam can make 1 poster or 400 data entries

2. Brenda can make 2 posters or 1200 data entries and

3. Richard can make 3 posters or 900 data entries

This means that the total number of data entries made in a day will be 400+1200+900=2,500
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Therefore, a total of 2,500 data entries will be made in a day

(b)According to the data given above that, Adam can make 1 poster a day, Brenda can make 2
posters and Richard can make 3 posters a day. In the case that we should choose one team member
to make posters, Richard would be chosen. Reason being that, the opportunity cost will be lower.
we would make three (3) posters at the cost of 900 data entries. As compared to the other two team
members Adam and Brenda.

(c) The opportunity cost of Richard making 3 posters a day is 900 data entries and the opportunity
cost of making each poster a day will be 3 posters=900 data entries =300 data entries
3 3
(d)Adam can make 1 poster or 400 data entries in a day, and Brenda can make 2 posters or 1200 data
entries in a day. Therefore Adam would be selected, reason being that the opportunity cost of Adam
making 1 poster to make data entries is only 400. Meanwhile if Brenda is selected, the opportunity
cost of making 1 poster would be 2 posters=1200 data entries =600. Hence, it is more efficient to
assign Adam. 2 2

(e)

Production Posibility Frontier

3000

2500 0;2500

2000
Data Entries

1500 3;1600
4;1200
1000

500

0 6;0
0 1 2 3 4 5 6 7
Posters
 UNIVERSITY OF ZAMBIA
INSTITUTE OF DISTANCE EDUCATION
SOB 1115: MICROECONOMICS ASSIGNMENT 1
The points on the PPF curve represent efficient combinations of posters and data entries that the
team can produce. Points inside the curve represent inefficient combinations (e.g, the team is not
using all of their available resources), while points outside the curve are unattainable given the
team’s current resources and technology.

Question three
a) Assume that farmers in a given area are able to switch back and forth between potato and wheat
production depending on market conditions. Similarly, consumers tend to regard potatoes and
wheat as substitutes. As a result, the demand and supply of Potatoes are highly sensitive to
changes in both potato and wheat prices. Demand and supply functions for Potatoes are as
follows:

QD = -1,450 - 25P + 12.5PW + 0.2Y, (Demand)

QS = -100 + 75P - 25PW - 12.5PL + 10R, (Supply)

(1)To determine the demand and supply of Potatoes, we need to substitute the given values (PW =
K4, Y = K7, 500 billion, PL = K8, and R = 20 inches) in the demand and supply functions as follows:
Demand: QD = -1,450 – 25P + 12.5(4) + 0.2(7500) = 100 - 25P
Therefore, QD = 100 – 25P

Supply: QS = -100 + 75P – 25(4) - 12.5(8) + 10(20) = - 100 + 75P

Therefore, QS = -100 + 75P

(2) To calculate the surplus or shortage of Potatoes, we need to compare the quantity demanded
(QD) and quantity supplied (QS) at different prices:
At P = K1.50
QD = 100 – 25(1.50)
QD= 62.5 million medas

QS = -100 + 75(1.50)
Qs= 12.5 million medas

QD - QS = 62.5 – 12.5 = 50 million medas (Shortage)

Therefore, at the price of 1.50 there is a shortage of 50 million medas, as the quantity demanded is
more than the quantity supplied.

At P = K2
QD = 100 – 25(2)
QD= 50 million medas
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SOB 1115: MICROECONOMICS ASSIGNMENT 1
QS = -100 + 75(2) = 50 million medas
QD - QS = 50 – 50 = 0
Therefore, at the price of 2 there is no shortage or surplus, as the quantity demanded is equal to the
quantity supplied. Meaning that at the price of 2 and the quantity of 50, market is in equilibrium.

At P = K2.50
QD = 100 – 25(2.50)
QD= 37.5 million medas

QS = -100 + 75(2.50) = 87.5 million medas

QD - QS = 37.5 – 87.5 = -50 million medas (Surplus)
Therefore, at the price of 2.50 there is a surplus of 50, as the quantity demanded is less than the
quantity supplied.

(3)To calculate the market equilibrium price and quantity, we need equate the QD to the QS and
solve for P: QD = QS
100 – 25P = -100 + 75P
100 + 100 = 75P + 25P
200 = 100P
P = K2
Substitute P = K2 back into either the demand or supply equation to get Q: Q = 100 - 25(2) = 50
million medas of potatoes. Therefore, the market equilibrium price is K2 and the equilibrium
quantity is 50 million medas of potatoes.

(4) Price elasticity = PED =(% change in quantity demanded) when price changes from K2 to K1.5
(%change in price)

At P = K1.50 PED= (62.5 – 50) 2 = 12.5 x 2 = 25 =PED= -1 unit elastic

(1.5 – 2) 50 -0.50 50 -25
PED=-1 unit elastic this occurs where price and quantity demanded change by the same proportion

At P = K2; PED = (50 – 50) 2 =0x2 =PED=0 Perfect inelastic

(2 – 2) 50 0x50 0

PED = 0 (Perfectly inelastic) Whatever the % change in price there is no change in quantity
demanded. Price elasticity is then said to be perfectly inelastic

At P = K2.50; PED = Q2 – Q1 x P1
P2 – P1 Q1
= (37.5-50) 2 =-25 =-1 unit elastic
(2.5-2) 50 25
PED=-1 (unit elastic) this occurs where price and quantity demanded change by the same
proportion. In this state price is said to be unity elastic.
 UNIVERSITY OF ZAMBIA
INSTITUTE OF DISTANCE EDUCATION
SOB 1115: MICROECONOMICS ASSIGNMENT 1
(5)Determinate of price elasticity of demand and supply
Demand;
1. The number and closeness of substitutes
2. Proportion of income spent spent on goods
3. The number of users of a commodity
Supply;
1. Production time period
2. Availability of factors of production

Question Four
a) Suppose there is a new residential area in town. The area is composed exclusively of flats and is
populated by low-income residents. The people who live in the area tend to stay in that area
because (1) they cannot afford to live in other areas of the town, (2) they prefer to live with people
of their own ethnic group, or (3) there is discrimination against them in other areas of town. Rents
paid are a very high percentage of peoples' incomes.

(1) the demand will be relatively inelastic. The argument is based on the fact that the residents in this
area have few substitutes as they are unable to move to other areas for the fear of being discriminated.
Additionally, these residents are already paying a high rentals and since accommodation is a necessity,
a slight increase in rentals may not have a huge impact on the demand

(2) The supply of flats in such an area is likely to be relatively inelastic. Reason being that investors
that invest in housing are mostly after profit maximization and seeing that the area is populated with
low-income residents. Hence, they intend to shun investing in such areas which is resulting in
decrease of supply
(3)
(Price)P
D S

Equilibrium price and quantity

Q
(quantity)
Both demand and supply curves are showing a steep slope as they are both relatively inelastic.

b) (1)The introduction of a subside on rental paid by residents in the area would mean that they get
to spend less on their income on rentals. This will now increase the demand for apartments in the
 UNIVERSITY OF ZAMBIA
INSTITUTE OF DISTANCE EDUCATION
SOB 1115: MICROECONOMICS ASSIGNMENT 1
area which will cause the demand curve to shift to the right resulting in a new market equilibrium
as there will be more demand than supply.

b) (2) Analyze the results of this program. Show the results on the graph and explain what will result.

(Price) P D2
D1 S

P2
P1

Q
Q1 Q2 (quantity)
The residents get to gain more from the introduction of subsides which has made a positive impact of
their rentals causing the demand curve to shift to the right.

(b) (3)The introduction of the subsidy on the side of the supplier, will mean that the developers or
suppliers get to spend less on the cost of building new flats. This program is going to shift the supply
curve to the right as developers are now on incentives to enable them build more flats.
P
(price) S
S
P1

P2
D
Q
Q1 Q2 (quantity)
Therefore, Tenants gain from this program for paying lower rentals and they have more disposable
incomes. Developer or suppliers also gains from this program as they receive subsidy for building
new flats. The government will now incur a cost by paying building subsidies.
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INSTITUTE OF DISTANCE EDUCATION
SOB 1115: MICROECONOMICS ASSIGNMENT 1

References

• Adam Smith, (1776). An inquiry into the nature and causes of wealth of Nations. Edinburgh,
Scotland. W.Strahan and T. Cadell, Landon.

• Sanford Ikeda; (1996). Dynamics of the Mixed Economy: Toward a Theory of

Interventionism London: Routledge 1997
 "social democracy". Jason P. Abbot. Routledge Encyclopedia of International Political
Economy. Ed. R. J. Barry Jones. Taylor & Francis, 2001. 1410
 Schiller, Bradley. The Micro Economy Today, McGraw-Hill/Irwin, 2010. "Mixed economy.
 Tawney, R. H. (1964). Equality. London: Allen and Unwin. ISBN 0-04-323014-8.
 Jump up Crosland, A. (1977). The Future of socialism. Westport, Conn: Greenwood Press.
ISBN 0-8371-9586-1.
 David Begg, Gianluigi Vernasca, Stanley Fischer and Rudiger Dornbusch ISBN-13
9780077129521 ISBN-10 0077129520