The Differences between Markets and Central Planning Literature review

The Differences between Markets and Central Planning - Literature review Example The Coase theorem states that the problem of externalities will be resolved through bargain when there are no transaction costs and that property rights are well defined, the theorem states that firms in conflict will bargain and one firm may acquire the property right of the other firm however the assumption is that there are no transaction costs. This theory defines the existence of firms in the market economy in that despite the existence of externalities and conflict, firms in a market economy will, in the long run, will attain equilibrium through bargain and this will ensure proper allocation of resources and property rights The price elasticity of demand is a measure of the responsiveness of the quantity demanded as a result of change in the price of a good or service, high price elasticity of demand means that when price is increased by one unit then demand will decline by one or more units, there are those goods and services with inelastic, elastic and perfect elasticity of demand. Income elasticity is also a measure that aids in determining the responsiveness of demand to changes in the price of a product, it measures the change in demand of a product as a result of an increase or decrease in income. In the last 10 to 15 years most firms have experienced elastic price elasticity of demand, this has been attributed to the fact that there are many firms in the market and also existence of substitutes in the market, as a result of this an increase in the price of a good will lead to a decline in the demand for that good due to existing substitutes and alternative.