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Market economic system — practice questions

Practice and worked examples for 2281 Market economic system. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Compare how a market economy and a planned economy would respond to rising demand for electric vehicles.

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Market economy: Higher consumer demand shifts demand right → price rises → profit incentive attracts firms → supply expands; resources (labour, capital) reallocate via price signals. Firms that fail to adapt lose market share.

Planned economy: Central planners may set EV production quotas, allocate steel and battery inputs, and direct state factories. Response may be slower if planners lack local information; quality and variety may be limited.

Evaluation: Markets adjust quickly but may ignore pollution externalities (→ 3.1). Planners can prioritise long-term goals but risk inefficiency and lack of consumer sovereignty.

Worked example 2

A market for wheat has the following demand and supply functions: Demand: Qd = 1000 - 20P Supply: Qs = -200 + 40P where P is the price in dollars ($) per tonne and Q is the quantity in thousands of tonnes.

(a) Calculate the equilibrium price and quantity determined by the market mechanism. (b) If a central planner sets the price at $15 per tonne to make wheat more affordable, calculate the resulting shortage.

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Part (a): Market Equilibrium

Step 1: Find the equilibrium price (P) Set quantity demanded equal to quantity supplied (Qd = Qs). 1000 - 20P = -200 + 40P

Step 2: Solve for P Add 20P to both sides: 1000 = -200 + 60P Add 200 to both sides: 1200 = 60P Divide by 60: P = 1200 / 60 P = 2020 The equilibrium price is $20 per tonne.

Step 3: Find the equilibrium quantity (Q) Substitute P = $20 into either the demand or supply equation. Using the demand equation: Qd = 1000 - 20(20) = 1000 - 400 = 600 Using the supply equation: Qs = -200 + 40(20) = -200 + 800 = 600 The equilibrium quantity is 600,000 tonnes.

Part (b): Calculating the Shortage

**Step 1: Calculate quantity demanded at the planned price of 15∗∗15** Qd = 1000 - 20(15) = 1000 - 300 = 700 At $15, consumers want to buy 700,000 tonnes.

**Step 2: Calculate quantity supplied at the planned price of 15∗∗15** Qs = -200 + 40(15) = -200 + 600 = 400 At $15, producers are willing to supply 400,000 tonnes.

Step 3: Calculate the shortage Shortage = Quantity Demanded - Quantity Supplied Shortage = 700 - 400 = 300 The resulting shortage is 300,000 tonnes.

Conclusion: The market mechanism would have allocated 600,000 tonnes at a price of $20. The central planner's intervention at $15 created a shortage of 300,000 tonnes, as the low price increased demand but discouraged supply. This illustrates the information and incentive problem in planned systems.

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