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Economics Essay Example: Difference Between Laissez-faire and Command Market Systems

3 pages
818 words
Wesleyan University
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Laissez-faire markets are the kind of marketing systems which the market players such as the buyers have full control of the market without government interference. Demand and supply equilibrium is agreed upon by these private investors. Command markets, on the other hand, are fully under control of the government. The authorities set all the policies governing this kind of markets.

How positive and negative externalities lead to under- and over-allocation of resources

Externalities are factors which induce a change in demand of consumers or supply of producers in thus offsetting the market equilibrium. An externality can be described as the costs and benefits inflicted upon a third party which is not a player in the market transaction. Negative externalities happen when costs are inflicted on a third party like the society; the cost would be pollution thus the demand for goods will drop due to costs involved. Low demand will mean that there will be over-allocation and spillover of goods produced. Positive externality happens when the society benefits from the market, thus leading to increased demand for products thus supply reduce due to shifting in equilibrium. Therefore, resources are under-allocated (Nikolaus Kriegeskorte, 2005).

Why government failure happens

Government failure is when the interventions in the economy cause inefficiency in resource allocation and poor economic performance. The government interventions can fail due to lack of incentives by the public sector to improve services as well as the cut cost of production. Moreover, failure could be due to lack of information as well as political interference (Nikolaus Kriegeskorte, 2005). Furthermore, lack of consistencies due to change of government could fail in implementing economic developments.

Effectiveness of total revenue test for price elasticity and demand

It is assumed that the price is the only factor which affects demand and elasticity with all the factors being held constant (Nikolaus Kriegeskorte, 2005). Goods which have inelastic demand reacts to price increase such that the revenue increases too, thus price increase has the least effect on demand. While those with elastic demand show a decrease in demand due to increase in price (McConnel, 1987).

Factors that affect price elasticity of demand and price elasticity of supply and their application

Price elasticity of demand is influenced by factors such as availability of close substitutes when close alternatives are available in the market, then the elasticity of demand will be elastic and vice versa. Another factor is the necessity of the product; necessities have inelastic demand while luxuries are elastic (Tenopir King, 2000). Price elasticity of supply, on the other hand, is significantly affected by the nature of the industry under consideration as this dictates the ability to vary production quantity in response to changes in price. Moreover, elasticity is affected by the will of investors to take risks as well as the nature of the products being produced. Both elasticities supply and demand are applicable in taxation as well as determining wages by the authorities.

Federal Reserve

The Federal Reserve acts as an organ which conducts all the monetary policy thus ensuring financial system stability to support a healthy economy. Moreover, it promotes consumer protection thus shielding exploitation in the marketplace. The independence of the Federal Reserve is of great importance in shielding it against any political influence which would sabotage the economy (White, 2014).

Money supply refers to money in circulation and any other liquid asset; this affects inflation, prices of goods and business circle. The Federal Reserve come up with policies to regulate money supply thus a healthy economy.

Why do economic costs include both explicit costs and implicit costs?

Explicit costs are direct costs which are incurred for running a business and have an immediate impact on the profitability of a company. They involve physical and tangible assets owned by a company. Implicit costs, on the other hand, are implied costs which arise due to opportunity loss. They are indirect expenses which arise from emergencies (McConnel, 1987). Both explicit and implicit costs are useful in determining the economic profitability or loss made by a company.


Variable costs are associated with the amount expenses incurred while running the day to day activities of a company and it varies with the level of production. Fixed costs, on the other hand, are incurred from fixed assets, and they remain the same without deviating in the short run (McConnel, 1987).Total costs are the amount of all the total economic costs of running a business while average costs equal the total costs of production divided by the number of products produced. Marginal costs, on the other hand, describe the change in production costs when the production quantity changes by one unit.



Mcconnel, C. (1987). Economics: Principles, Problems And Policies. New York: Mcgraw-Hill.

Nikolaus Kriegeskorte, D. D. (2005). End Of Monopolistic Markets. Boston: Uni. Press.

Tenopir King, E. W. (2000). The Economics Of Electronic Journals. Washington Dc: Sla Publishers.

White, L. (2014). The Federal Reserve System's Influence On Research On Monetary Economics. Journal Of Economics, 655.


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