Economic Principles: Understanding Production, Markets, and Competition
The Need to Choose
The economy appears to overcome the shortage of resources, and we must say to dedicate our resources and needs which we met. The decisions are economic agents: households, firms, and the state. Decisions must be taken with efficiency in using resources and equity in income distribution.
- Primary Needs: These are essential for survival, but today, the needs to live in dignity as a citizen.
- Secondary Needs: They arise with the development of society and increase the level of wellness.
Economic Crisis
Crisis: It is a relative term because it is present in all societies but manifests in varying degrees between countries and people.
Fundamental Economic Principles
- Opportunity Cost: We must give up something to get our need.
- Sunk Costs: Costs from the past are not recoverable and need not interfere with existing decisions.
- Marginal Analysis: We make decisions by looking at the benefits versus costs.
- Incentives: When people change their behavior to obtain a reward.
Factors of Production
Factors of Production: Resources needed to produce goods and services.
- Land: Natural resources and raw materials needed to produce goods and services.
- Renewables: Use is not exhausted.
- Non-Renewables: Are depleted when used.
- Mixed: Their use is exhausted, but with judicious and sustainable management, we can use them.
- Labor: Any human intervention to produce goods or services.
- Capital: Assets that are not consumed but produce other goods or services.
Productivity and Labor
Productivity: Goods and services obtained รท Factors used.
Technical Division of Labor: A method of organizing production so that each worker specializes in one phase of production, but assuming increasing dehumanization of the worker.
Division of Labor and Independence: Specialization is exchanging goods you need but do not produce goods that you produce.
Determinants of Productivity: These are the training, experience, and skill of workers, the organization of business management, and technological change and investment in capital assets.
Production Potential and Economic Growth
Production Potential: Maximum goods and services that can be produced in a given time using all resources efficiently.
Efficiency: Producing more goods and services possible with available resources.
Economic Growth: Increase in total production in a country by increasing the factors of production, immigration, and improving productivity with advanced machines and training of workers.
Economic Policy and Sectors
Positive Economics: Analyzes an economy and predicts its variation depending on events.
Economic Policy: Proposals for measures seeking to improve the economic reality.
- Primary Sector: Activities that draw products directly from nature.
- Secondary Sector: Activities that transform raw materials into finished products.
- Tertiary Sector: Activities that produce services for the population and businesses.
Economic Agents
Household Economics: A person or family that meets your needs with the consumption of goods and services. Family income is their ability to earn income or expense. You have to choose rational preferences and purchase goods.
Enterprises: Operators who produce goods and services that society demands. The economic rationality of business is to maximize the benefits, being higher sales of the costs. Profits are shared or are reversed.
Public Sector: It is controlled by political power and consists of government and public bodies and companies in which the state participates. Provides goods and services and corrects inequalities.
Economic System: How a society organizes itself to solve basic economic problems.
Market Structures and Competition
Competition: Rivalry among several companies that want to sell the same goods or services to the applicants.
- Perfect Competition: A large number of supply and demand, no company can influence the price of the product; they are small businesses so that no bidder is stronger than another. Consumers win for low prices and a very high amount of goods produced. The product sold is identical (e.g., agricultural products and fish markets).
- Imperfect Competition: The bidders, if they have some power, can influence the prices of the products they sell.
- Monopolistic Competition: A large number of suppliers, companies produce goods that are differentiated from the competition (e.g., agricultural products or appliances with designation of origin).
- Oligopoly: The number of bidders is small compared to a large number of consumers. Of rivalry and fierce competition (e.g., mobile phones, banks, and car manufacturers) and cooperation and agreements (e.g., oil).
- Monopoly: One or more, but one bidder over 90% market share. This is the worst market for consumers for higher prices. The countries enact antitrust laws and prohibitions.
Barriers to Entry
Barriers to Entry in Economic Activity: Obstacles to a company to start a business.
- Legal: You need special regulatory requirements, or the state limits the number of companies in the market.
- Economic: The activity requires a very high initial investment.
Characteristics of Market Structures
Perfect Competition: A type of market in which there are many small companies so that no bidder is stronger than another, producing a single differentiated product. Products cannot influence the price of the product.
- There are few barriers to entry and exit.
- Many small producers make an insignificant portion of the total market.
- The product exchanged in this market is homogeneous with full information.
- The producers have no power to set the price, so we talk about business-acceptable prices.
Antitrust: Market with plenty of bidders for its low barriers to entry and exit to sell similar but distinct from each other.
- Few barriers to entry and exit.
- Large quantity of products.
- Exchange of differentiated products.
- The product has some power to set prices but only a little above the market.
Monopoly: A market in which a company controls all or over 90% of the supply of a product.
- When a company controls all the resources needed to produce that good.
- When a company holds sufficient control to deliver a unique technological product.
- When a state only allows a company to provide the product (legal monopoly). Patents are often from natural monopolies.
- It is cheaper than a single company has made the service, so high fixed costs.
Consequences: The price is always higher than when there is competition, and the quantity produced is always less.
Oligopoly and Game Theory
Oligopoly: Market with a limited number of suppliers that produce similar goods. The decisions of these companies influence the strategy of their competitors. Participating companies try not to compete for prices and strive to differentiate their products to convince consumers that it is better than the competition. Advertising can increase sales at the expense of the competitor. The major barriers to entry cause:
- The number of companies competing in the market is usually small.
- Large companies, and each has a significant percentage of the market share.
- The decisions made by a company have a decisive influence on what others will do.
Duopoly: Only two firms in an oligopoly.
Cartel: A formal agreement to perform various oligopolistic firms to obtain greater benefits with the pricing, distribution, or functional market or limiting the overall production. These behaviors are prohibited by the laws of competition.
Market Share: Share of global production of a sector that corresponds to a company, product, or brand.
Game Theory: Studying the behavior of economic agents in situations of independence. Cooperation brings better consequences than the competition. It is better to partner with those who have the same intention to leave all that we are winning, but if one fails to respect a prior agreement, they may come out ahead in the short term, even at the expense of their competitors. The profits of an enterprise depend not only on their performances but also on those of its competitors.
- Behavior of Competitors: Cooperative: The bidders agree on the production, and everyone wins.
- Non-Cooperative Equilibrium or Nash: No cooperation possible, each company adopts the dominant strategy, and is the worst possible situation.
- Unfair: After having reached a prior agreement, one or more companies break it for additional benefits.
- Tacit Collusion: It occurs in an oligopoly where the agreements without competitors do not lower prices or limit production not to reduce benefits.