(a)   Is there a practical alternative to the market economy?

Yes, there is other alternative to market economy namely centrally planned market economy. Market economy refers to an economic system whereby prices and economic decisions of goods and services are guided by interaction of people and business. Demand and supply forces dictate what price an item will be sold at. The government does not intervene to regulate economic practices in such markets unless they become exploitative to consumer of goods. On contrary, centrally planned market is where government or state has control over economic decisions. In this market government regulates activities by establishing by-laws and policies to protect consumer from exploitation by sellers in market (Hulgård, 2011). Example of centrally planned market is monopoly which is characterized by fewer sellers of product. When economic decision are left to interaction of buyers and business, consumers can be over priced since there are no alternative place to get services. To avoid that, Government intervenes to regulate economic decisions by establishing ceiling prices.

(b) Explain the expected effect on price and quantity in the market owing circumstances.

(i) When consumer incomes rise

Demand and supply forces in economy determine market equilibrium. Demand and price are inversely related such that when demand increases, price decreases. As a result of such trends, buyers and sellers need to understand underlying market trends to know when to buy and sell goods for them to get profit. For instance, when consumer incomes rise, the prices of goods may increase. High incomes result in high consumer purchasing power to buy goods at higher prices (Mankiw & Taylor, 2014). In addition, due to the increased ability to buy, the quantity demanded may increase leading to increased supplies. In the case of inferior goods, the rise in consumer incomes leads to a decline in quantity purchased. Therefore, high consumer incomes make people buy goods and services without any pinch.

Price        p2

Price             p2

                p1

D1                 D2

                                                             q1             q2

Quantity demanded

Technical improvements reduce production costs. Production cost refers to total cost incurred in transforming raw material into one unit of production. Technical improvements enhance the effective and efficient use of resources. When production cost is high, prices for goods tend to increase. To create competitive advantage, managers have to establish strategies which will reduce production cost to enable them sell product at cheaper price. High production cost implies that the organization will operate under limited goods and this reduces the supply of the good in the market. As result, the company will not achieve its objective of maximizing profit.

Home

 D

Price

                  S

                   S1

D

Q          Q1

The price of fixed-line calls falls sharply. When the price falls, the demand increases leading to a high supply of the product (Ruttan & Thirtle, 2014). For instance, low prices will make consumers to afford lines and thus make them buy more.  High demands reduce prices in the long run as almost all people will have the same device.

           D

   P1

    P2

Q1  Q2

(c) Explain why the income elasticity of demand for food tends to be low in rich countries.

Income elasticity of demand refers to the degree of responsiveness for the quantity of good demanded to a specific change in real income of consumers keeping other factors constant (Friedman, 2017).  Income elasticity of demand for foods tends to be low in rich countries due to fact that developed countries have high incomes to cater for food. Necessity goods do not change with changes in incomes and thus regardless of the level of income, consumers are capable to purchase in rich countries. Developing countries are characterized by low incomes and poverty in most regions. This implies that a high proportion of income is used to purchase food. As result, increase in real income of consumer will make them buy special diets making the income elasticity to be high (Wetzstein, 2013).

Graph explaining why the income elasticity of demand for food tends to be low in rich countries.

(Source: economichelp.org, 2017)

According to Engels law, Families in poor regions tends to spend a larger percentage of income on foods compared with families in rich nations. This is because rich nations are interested in luxurious goods due to their stable incomes. Demand for superior goods is expected to have high-income elasticity in rich countries (Johnson, 2017). For instance demand for wine and spirits. Most luxurious goods are not basic since people can stay without consumption. They are used to set class and a sense of belonging to a particular group of people. For instance, low brand wines are consumed by low-income people while strong quality wines are taken by rich prestigious people. When income rises, these groups will tend to upgrade their beverage by taking the most expensive ones. Sports cars are also used for luxurious and therefore consumers will tend to purchase them depending on their level of income (Luo & Song, 2012).