Question

1. State and explain three axioms of economics
2. Explain the following
a. Capitalism
b. Communism
c. Socialism
3. What is market failure?
4. State and explain 2 causes of market failure with an example and explain the example
5. State and explain 4 market system
6. What are the three economic questions? How do these three economic questions get addressed by different economic systems.
7. The relevance of Capitalism, Communism and Socialism

Answer 1

Axioms refer to the statements that are considered universally true and used to derive logical conclusions.

Axioms of economics include:

1. Competitive market generates zero economic profit in the long-run: This statement is true because, in the short-run, sellers enjoy the supernormal profit that encourages more sellers to enter the market. Increase in a number of firms will reduce the price of the commodities and maintain the price level equal to marginal cost in the long-run. As a result, firms gain zero economic profit in the long-run.
2. Different prices at different locations maintain equilibrium: living standard of people changes with the change in the locations due to which producers cannot charge the same price level from different locations. It will hamper the revenue of the producer, and sometimes, potential customers are not able to get products at the existing price level. Therefore, there should be different prices to maintain market efficiency.
3. Externalities cause market inefficiency: market inefficiency refers to the situation when the existing price level does not reflect the equilibrium price level where resources are not fully utilized in the market, or one of the parties get a lesser benefit. Externalities can be positive or negative, that affects the equilibrium level of the market.

1. Capitalism: It refers to an economic system where resources are owned by the individuals to make a profit from it, and the government does not intervene in the private properties of the people.

2. Communism: It refers to the system where no government and individuals own resources; a group of people of society produce resources and distributed them equally. This system emphasizes a smaller section of privately controlled resources.

3. Socialism: it refers to the political as well as economic system that emphasizes the primary role of the government that distributed the resources equally among the people. Individuals do not have control over the resources.

• Market failure is the situation when rational human beings unable to get a rational outcome from their action. It is the position when the equilibrium price or equilibrium quantity is not achieved.

Causes of market failures are:

1. Free Riding problem: free Riding problem is associated with the public goods for which only a smaller part of the population pays, and a larger part of the population get the advantage of it due to which people who pay for it, do not get maximum utility. For example, some people votes in the elections, while some people do not vote, still, they will get benefit from the government, and no one will be guilty of not to vote.

2. Asymmetric information: In every economic transaction, there are two parties such as seller and buyer. This problem arises when there is uneven information among any one of the parties due to which the person with more information can be better-off from the deal, while a person with lesser information will have to bear consequences. For example, an insurance company try to sell its insurance to the people, it generally explains the positive side of the insurance policy due to which a buyer of insurance policy does not know all the information a company knows about the insurance. This transaction may be bad for the buyer as he does not know all the terms and conditions of the policy.