Question

A ruthless dictator has recently taken over the small island of Tokoli’s government and is making changes to how the government and economy used to be. One of his first actions is to enforce a command economy so as to control all aspects of the country. As you watch this new dictator’s changes, which of these actions would be in line with this new command economy he is creating?

He deregulates government owned land and resources and allows the people to purchase them and create private businesses.

He creates a new government body called the Ministry of Planning which will set wages, prices and production targets to reach each month.

He opens up the economy to admit foreign companies to create business in the country and have access to the country’s resources. In 2000, the demand for audio CDs was increasing as more people purchased them to listen to during commute time. Later in the year the price of aluminium (a material used in CDs) decreased. In 2001 the iPod was launched. The new technology began shifting the market and downloading digital audio became a viable substitute for CDs. As digital technology has improved since 2001, downloading audio files continued to increase with the demand for CDs dropping. If you were drawing a supply and demand graph to illustrate the changes to the CD market between 2001 and 2011, what would you say has happened to the market and the equilibrium price and quantity of the CD market since 2001? With the demand shifting to the left, and supply shifting to the right, the equilibrium price and quantity for CDs decreased from 2001. The demand curve shifted to the left, and the supply curve shifted to the right, the equilibrium price for CDs decreased from 2001 and it is impossible to determine the effect on the quantity. Supply and demand curves have shifted to the left and the equilibrium price for CDs has decreased since 2001.

Answer 1

(Part 1) Option (2)

In a command economy, the government sets all production decisions in the economy by controlling & regulating the resources.

(Part 2) Option (2)

Lower demand will shift demand curve leftward, decreasing price and decreasing quantity. Improved technology will increase supply which will shift supply curve rightward, decreasing price and increasing quantity. The net effect is a definite decrease in price, but quantity may rise, fall or remain unchanged depending on magnitude of shift in demand curve and shift in supply curve.