Explain and illustrate the roles played by profit in allocating scarce resources within the economy over time.
(a) Explain and illustrate the roles played by profit in allocating scarce resources within the economy over time. [10m] Profit being a form of return from risk-taking and entrepreneurship, plays a significant role in allocating limited factors of production (land, capital, entrepreneur, labour) in the economy over time. It acts as a signaling mechanism in the free market system and funds capital investment so as to generate more returns in the future. Furthermore, it serve as an indicator to producers on what and how much to produce, how to produce and for whom to produce. This allows them to allocate scarce resources effectively and hence, maximize profits. Traditionally, the objective of every firm is to maximize their profit. This can be done by producing at the output level where marginal revenue=marginal cost (MR=MC). At this point, the additional revenue that a firm would earn by selling one more unit of good would be equivalent to the additional cost required to produce it. Hence, firms would allocate their resources to increase output till this point as reflected in the diagram A. As shown in Diagram A, producing at output level, Q1 would result in a profit earned reflected by the blue border box. However, the firm is not producing at the optimal output level of Q2 which generate the highest
I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article
Recently in United Kingdom- a powerful and wealthy economy, there has been an issue being discussed with growing worry. The problem, not so strange to most countries in the world, is inflation, more specifically "the surge in UK inflation rate" in 2005. I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article is the drop in the inflation rate in 2005 in three successive months, what causes have led to such a decrease after months of increasing inflation, what actions have been taken to bring down the rate of inflation and the effects that such a drop created. The major concepts involved in the article are inflation itself, CPI, RPI, inflation rate, cost push inflation, interest rate. The first concept, inflation itself is actually a sustained increase over a period of time in the general price level, in other words a fall in the real purchasing power of money. To understand about inflation, another concept is involved which is CPI: The consumer price index (CPI)-the measure of the consumer price level. What is CPI? CPI reports the cost of a fixed "market basket" of consumer goods and services over time. The formula of calculating CPI for a particular year is found as follows: Price of the most recent market basket in the particular year CPI =
