MBA Economics Principles and Decision Making Assignment Solution

This economics assignment solution addresses fundamental economic principles and their application in decision-making. The solution answers questions on the three basic economic questions (what, how, and for whom to produce) and discusses the role of scarcity in resource allocation. It explains how sellers in the market make production decisions and the impact of government intervention. The assignment also delves into allocative efficiency, exploring its importance in meeting consumer needs and the consequences of allocative inefficiency, including market failures and deadweight loss. It provides examples of wasteful allocative efficiency, such as negative externalities and monopolies. The solution concludes by emphasizing the importance of allocative efficiency for societal and economic well-being, referencing key economic concepts and relevant literature.

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ECONOMICS PRINCIPLE AND DECISION MAKING

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Contents
Question 1:.................................................................................................................................3
Question 3..................................................................................................................................3
Reference....................................................................................................................................5

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Question 1:
The three basic questions of economics are,
1. What to produce?
2. How to produce?
3. For whom to produce?
With a given level of resources in the economy, the sellers of the market need to decide what
to produce for the economy. For example, basic economics with their limited resources
chooses to produce foods and shelter (Kreps, 2019). As the economy grows it then starts to
produce a more luxurious set of goods and services. For example, given the situation of the
market, the sellers need to decide where they will use their limited resources, food or
aeroplane.
The sellers of the markets are profit-seeking and hence they want to reduce the cost of
production by using the resources efficiently. Thus, the most cost-effective ways are chosen
by the sellers of the market (Iossa & Martimort, 2015). The quest of the sellers of the market
to reduce the cost of operation also provides the incentives for innovation. In the process of
how to produce, the government can also restrict the sellers to save the interest of the society
and environment.
In a classical free market, the sellers produce the goods and the services for the customers of
the market who can afford them. In basic economics, barter exchanges are used for the
transaction of goods and services between the customers and the sellers. With the
development of economy, it starts to sell goods in exchange of currencies. The market can
also become an altruist in some of the cases producing for the underprivileged, for example,
the unemployment benefits provided by the government.
Question 3
The allocative efficiency is meant by the ability of the market to perfectly meet the needs of
the customers of the market. However, allocative inefficiency is wasteful as it creates a
deadweight loss in the economy reducing the total surplus. Inefficiency in allocative
efficiency can lead to market failure unequal distribution of goods and services from the free
market. Allocative inefficiency reduces the consumers’ surplus of the market-leading to the
creation of space in that is lost from the social welfare (Martimort et al. 2015). One of the

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examples of wasteful allocative efficiency is the negative externality which arises when an
economic entity does not incorporate the social cost in the cost of producing a product.
Allocative inefficiency also occurs where the sellers of the market have huge power over the
prices of goods and service. For example, the market of monopoly is an example of wasteful
allocative inefficiency where the consumers’ surplus is extracted by the monopolist reducing
the overall surplus of the society (Olitsky & Cosgrove, 2016). In these cases, the producers’
surplus is increased and the consumer surplus is reduced. Some part of the consumers’
surplus is captured by the producer while the other part goes to no one leading to a loss of the
society known as the deadweight loss. Therefore, the allocative inefficiency where the
producers fail to meet the exact demand from the customers of the market is wasteful for the
society and economy.

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Reference
Iossa, E., & Martimort, D. (2015). The simple microeconomics of public‐private
partnerships. Journal of Public Economic Theory, 17(1), 4-48.
Kreps, D. M. (2019). Microeconomics for managers. Princeton University Press, 33(1), 36-
69.
Martimort, D., Menezes, F., Wooders, M., Iossa, E., & MARTIMORT, D. (2015). The
Simple Microeconomics of Public-Private Partnerships. Journal of Public Economic
Theory, 17(1), 4-48.
Olitsky, N. H., & Cosgrove, S. B. (2016). The better blend? Flipping the principles of
microeconomics classroom. International Review of Economics Education, 21, 1-11.