Economic Activity, Systems, and Market Dynamics

Posted on Dec 17, 2024 in Economy

Chapter 1: Economic Activity and Economic Systems

The Need to Choose

1. The Concept of Economics

Economics deals with how societies manage scarce resources to produce goods and services and distribute them for consumption among members of society. In individuals, it is concerned with how they use their income carefully and wisely to obtain the maximum benefit. In a society, it deals with how individuals reach the highest possible level of material well-being from the resources they have available. The economy only cares for the needs that are met by economic goods, that is, by natural or scarce products made by man.

Microeconomics is the part of economics that studies the behavior of the domestic economy or consumers and businesses. Macroeconomics focuses on the behavior of the global economic system, reflected in a small number of variables, such as the total product of an economy, employment, and investment.

Microeconomics and Macroeconomics deal with the same issues but focus on different aspects.

2. The Economy and Meeting Needs

People need to eat, dress, etc. To do this, they have some resources or recipes that are not always enough to get all the goods and services they desire to meet their needs. Society’s needs occur in the same way as individuals; they also have needs, which means satisfying them. The satisfaction of material and non-material needs requires members to perform certain productive activities.

Human Need is the feeling of lack of anything attached to the desire to satisfy it.

  • Types of Needs
    • According to those raised
      • Natural (e.g., eating)
      • Social (e.g., celebrating weddings)
    • Needs of society
      • Collective (e.g., transport)
      • Public (e.g., public order)
    • According to its nature
      • Vital Needs or primary (on which life depends)
      • Minor needs (e.g., tourism)

3. Needs, Economic Goods, and Services

A good is all that meets, directly or indirectly, the wishes or needs of human beings.

  • According to their material
    • Material goods (e.g., a table)
    • Services (e.g., education)
  • According to its character
    • Free (e.g., air)
    • Economic (e.g., a car)
  • According to their nature
    • Capital
    • Consumer
      • Durable
      • Non-durable
  • According to their function
    • Intermediate
    • Final
  • According to consumption
    • Private
    • Public

4. The Economic Problem: Scarcity and the Need to Choose

The economic problem par excellence is scarcity. It arises because human needs are virtually unlimited, while resources, and therefore goods, are limited. Scarcity requires making economic decisions. Decision-making requires considering a number of objectives in relation to others. The same problem is faced by businesses and society as a whole, and in particular by the government, which decides whether to devote more resources to health or education.

Both for the individual and the family, company, or government, making decisions requires comparing costs and benefits, although in many cases, the cost of some action is not as obvious as it may seem. The opportunity cost of an activity is the goods or services that are given up to use the resources for this activity. The opportunity cost is what is given up to get something in return.

The production possibilities curve describes the different combinations of final goods and services that could occur in a given period with existing resources and technology.

The curve of production possibilities illustrates two key principles:

  • Scarcity
  • Opportunity costs

Economic efficiency means that, upon reaching the market, the company cannot increase the amount produced of one good without reducing that of another. Efficiency is the maximum output that can result from a good with certain resources used to produce it.

Chapter 2: Economic Activity: Factors and Agents

1. Resources or Productive Factors

Resources are the factors or elements used in the production of goods and services so that they can be called factors of production. Capital includes buildings, factories, machinery and equipment, stocks of established media, and other means used in the production process.

Types of Capital:

  • Physical or real capital: Instruments of all types used in production, such as buildings and machinery. Its length extends over several cycles.
  • Human capital: Education, training, and experience and, in general, everything that helps to raise the productive capacity of human beings.
  • Financial capital: Funds available for the purchase of physical capital or financial assets such as bonds or shares.

Entrepreneurship is defined as the ability to gather the resources needed to produce goods and services and technologies. People who have entrepreneurship are the ones that realize the opportunity to create new or improved products and gather the necessary resources to produce them.

2. Economic Activity and Economics

In economics, the diversity of roles played by economic agents, i.e., families or private households, businesses, and the public sector, can be classified by distinguishing three major sectors:

  • The primary sector includes activities that take place near the base of natural resources, i.e., farming, fishing, and mining.
  • The secondary sector organizes industrial activities through which goods are transformed.
  • The tertiary sector, or services, comprises activities to meet service needs that are not formed into something material.

3. Companies

The company is the basic unit of production. Companies, according to their activities, can be classified into three categories:

  • Industrial: These are processors. They buy raw materials to transform them into products ready for consumption. (e.g., steel and metalworking)
  • Commercial: They buy goods and then sell them. (e.g., stores)
  • Services: These do not produce or sell goods, but offer the consumer the direct enjoyment of an activity.

Types of companies in accordance with either natural or legal:

  • Individual: When a person is performing the basic activities.
  • Policies: The company belongs to a company or group of persons or partners. These companies may be regular press conferences when the partners contribute labor and capital and have unlimited liability: legally irregular, while some limited partners who bring capital and its liability is limited to the capital formed. Approach capital through a stock company is a limited partner by shares.
  • Limited: Partners contribute capital and are only responsible for subscriptions, not shares. These should be willing to set up the company and cannot get the titles or call negotiable shares.
  • Anonymous: The contributions of members are divided into shares or parts. Their responsibility is limited, as it focuses on the capital provided. The members are entitled in accordance with the number of shares held. Also participating in the administration and distribution of benefits. Furthermore, decisions must be approved by a majority.
  • When the partners contribute capital and labor, there is talk of a limited company working. When created to meet the needs of partners, they are cooperative, sharing risks and benefits.

Chapter 3: Economic Systems

1. Economic Systems and Basic Decisions

An economic system is the set of basic relations and technical and institutional characteristics of the economic organization of society. These relationships determine the direction of key decisions that are taken throughout the company and the predominant channels of its activity.

2. The Operation of a Market Economy

The functioning of a capitalist economy or market rests on a set of markets that buy and sell goods and services.

Markets and Money

A market is any social institution in which goods and services, as well as productive factors, are freely exchanged.

Markets and Prices

The price of a commodity is its exchange ratio for money, that is, the number of euros needed to obtain in exchange for one unit of a good.

The Invisible Hand

The market mechanism does not require direct contact between buyers and producers. The key to the market mechanism is the acronym for prices. If you want something and have enough money to purchase it, and there are a sufficient number of people who do the same, total sales of the product will probably increase, along with its price.

The Essentials

  • Producers offer goods and services that are profitable and for which there is demand.
  • Consumers can choose what they need, within their means of income. We assume that consumers will try to maximize their total utility, that is, spend their income in the way that they report the greatest personal benefit or satisfaction.
  • We can buy or rent the factors of production and, thus, become producers and offer the goods and services demanded by the market.
  • Changes in the supply or demand for goods lead to changes in the price of goods.

Prices can balance supply and demand.

Advantages

  • We can choose to produce and consume according to our preferences and availability.
  • The pricing system will allow all surpluses and shortages of goods and services not to last very long.
  • The state is not involved in deciding whether to produce.
  • Individuals have incentives to work productively. If producers put on the market what consumers want, they can reap large profits.

Disadvantages

  • There are market failures that hamper its operation.
  • There are vast differences in income that expose problems of equity.

3. Limitations of the Market Economy System

This system, however, also has some limitations, among which are the following:

  • Income is not distributed equally; it is distributed according to how the ownership of resources and prevailing wages are distributed. The result is that very large income differences appear.
  • There are market failures. It is argued that for various reasons, sometimes the market fails in its attempt to achieve economic efficiency.

Reasons for market failures are the following:

  • There are markets where competition is imperfect. In many markets, one or more participants can influence prices by setting the level that is most convenient.
  • External effects appear, such as contamination, that the market does not address. Thus, an industry that produces paper can contaminate the waters of a river where it sheds its waste. The activity of the industry affects farmers using water from the river, and the prices of paper produced do not reflect the damage that is causing farmers. An extreme case is the externality of public goods: those whose consumption by one individual does not reduce the amount available to others, such as national defense or the headlights of the sea, which poses serious problems. The use of such goods by anyone can be excluded since one cannot assign a cost for its use. The result is that they would be offered in an insufficient amount, even if their production is significant if the market produces them.
  • Also, the market fails in the case of goods or common property resources, or goods or services that are used in production and consumption, and are not owned by any individual in particular, often experiencing excessive consumption. Examples of such goods are fishing grounds in international waters or communal pastures.

Critics of the market economy also argue that its operation is objectionable for the two following facts:

  • Advertising can be used to manipulate consumers and create artificial needs.
  • Market economies tend to be unstable. The market economy is in the hands of private companies and tends to be very unstable, suffering from recurrent bouts.

4. Centralized Economy Functioning

The central power not only distributes the tasks of the plan but also the means of production, both material and financial. The control of power by the State carries out a more equitable income distribution.

The Growth of Bureaucracy

The operation of the system described requires the existence of a huge administrative apparatus; it is the only way to control the companies. The flow of information between the companies goes through a bureaucratic system, which necessarily must be broad and complicated. Moreover, it is essential to control and influence business, so the result is a growing bureaucracy. In fact, the so-called bureaucratic inferno was one of the events that determined the viability of the centrally planned system.

The Operation of Enterprises

For companies to reduce their costs, the result was a gradual process of indebtedness. While the debt was an acceptable volume, the system of central planning worked, but, according to this, their inefficiency made it more tangible and less easy to fund.

The Failure of the Market Economy System

The enormous growth of the bureaucracy, the lack of valid information, and effective incentives to improve the economic efficiency of the system are the ultimate reasons that explain the failure of centralized planning. There is no centralized mechanism that is able to collect and transmit information more efficiently than the system of market economy.

5. Mixed Economies

In a mixed economy, the public sector collaborates with private enterprise in response to questions about what, how, and why society as a whole. The mixed economy appears as an intermediate situation between the system of market economy and planned economy. At this level, a doctrinal concept of the economy appeared that is halfway between liberalism and Marxism; this is Keynesianism.

The theory developed by Keynes takes as its starting point a market economy and accepts its basic rules of the game. It relies on the efficiency of selective state intervention and the adoption of a series of tax policy measures as the chief economic policy. Keynes argued that the economy may be located on a continuous basis in some high levels of unemployment because the level of demand of the whole economy is insufficient. So he advocated state intervention to reduce unemployment by increasing government spending or through tax incentives for investment and consumption. Either way, it should be noted that since the early seventies, the success of Keynesian ideas began to crack.

The Current Neo-Liberalism

The growth and importance that Keynesian theory has reached the public produced a backlash, and a few years ago, there was a certain process of rediscovery of the free market, so we can say that we are witnessing a wave of neo-liberalism. It therefore seems that in today’s world, there is an enhancement of economic efficiency that the market mechanism can provide.