Aggregate supply and demand Term Paper Example | Topics and Well Written Essays - 1250 words

Aggregate supply and demand - Term Paper Example The resources that the world is endowed with are limited As a result the net profit increases. Answer 1: Resource Allocation Resource Allocation is the method in which the limited resources of an economy are distributed among the alternative uses that satisfy the wants of the users. The process of decision making by which it is determined which want is to be fulfilled and which is not is part of the allocation process. Scarcity This concept in economics means that the human needs cannot be completely satisfied because an economy does not have the sufficient resources that can contribute to production. The scarce resources include the factors of production, i.e. land, labor, capital and organization. For example, the amount of land that can be used for productive purposes is limited. This means that land is a scarce resource and the supply is limited (Schiller, 2010). Competitive Advantage A country X has a competitive advantage over another country Y if the country X has abundant res ources that are required to produce a good in the country and thereby enjoys a price advantage over the other country. For example, a country may be labor abundant compared to another country that is labor is available at a cheaper rate compared to the first country. Thus it reduces the cost of production for that country. Hence the first country has a competitive advantage over the second country in the supply of labor force.... Role of Supply and demand The market forces of demand and supply are instrumental in determining the price and quantity at which the trade between the buyers and sellers would take place. The market equilibrium will be achieved at the point where the quantity demanded will be equal to the quantity supplied (Pindyck and Rubinfeld, 2001). In the above figure the downward sloping graph depicts the demand for a good in the economy and the upward rising curve is the supply curve. At the equilibrium point the price at which the good is supplied is P* and the quantity demanded is Q*. Answer 2 The Laissez-faire theory has come from this concept in which there is opportunity for free entry and exit and the government does not impose any restriction on the functioning of the markets. On the other hand in the mixed economy the ownership of the means of production is shared between the government and the private players. In such economies the government has significant control over the economic variables though the capital accumulation is done mainly by the private sector (Conklin, 1991). The socialist economies are almost contradictory to these economic systems. In such a kind of economy the ownership of the factors of production remains with the general public. Such a kind of economic system is a planned one and the decision of allocation of the resources remain with the government. So the demand and supple forces are less significant in case of the socialist economies. Answer 3 If a particular business has abundant resources that it needs for its production them the company would be able to make huge profits compared to the other companies. For example, suppose a company that produces cloth has greater access